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Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to grow at a 12-percent annual rate forever. If Jackson's current market price is $40.00, what is the stock's expected rate of return (nearest .01 percent)?

a. 19.00%

b. 18.25%

c. 11.00%

d. 5.50%

Respuesta :

ahmedgodtrust

Answer:

Current dividend paid (Do) = $2.50

Growth rate = 12% = 0.12

Current market price (Po) = $40

Cost of equity (Ke) = ?

ke = Do(1 + g)  + g

             Po

Ke = $2.50(1 + 0.12)  + 0.12

                     $40

ke = $2.50(1.12)  + 0.12

                  $40

Ke = 0.07 + 0.12

ke = 0.19 = 19%

The correct answer is A

Explanation:

Cost of equity is a function of current dividend paid, subject to growth, Plus  growth rate divided by the current market price.

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