Common Stockholder Expected Return The common stock of Bounc

(Common Stockholder Expected Return) The common stock of Bouncy-Bob Moore
Co. is selling for $33.84. The stock recently paid dividends of $3 per share and has a
projected constant growth rate of 8.5 percent. If you purchase the stock at the market
price, what is your expected rate of return?

Solution

Solution:

Current price of share (P0) = $33.84

Next expected dividend (D1) = $3 + $3 * 8.50% = $3.255

Growth rate (g) = 8.50%

Expected rate of return = D1 / P0 + g

= ($3.255/$33.84) + 0.085 = 18.12%