The common stock of BJ's Auto Clinic sells for $38.25 a share. The stock is expected to pay $1.90 per share next month when the annual dividend is distributed. BJ's has established a pattern of increasing their dividends by 2.5 percent annually and expects to continue doing so. What is the market rate of return on this stock?

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anijesuajayi anijesuajayi · Answer 1 · 2020-02-22T07:16:13+01:00

Answer:

The Market value of return on this stock is 7.47%

Explanation:

First, the expected dividend for the next year = $1.9

The dividend's growth rate is 2.5%

Based on this information, we can calculate the market rate of return on the stock as follows

Market Rate of Return = (D1/P0) + g

where P0 is the current market price @ 38.25

D1 is the Dividend Expectd = $1.90

g is the Growth rate of dividend @ 2.5%

Using these and plugging them into the formula as follows:

Market Rate of Return = ($1.90/$38.25) + 0.025

= 0.074673

= 7.47%