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25 June, 02:24

KellyAnne Public Relations just paid an annual dividend of $1.27 on its common stock and increases its dividend by 3.4 percent annually. What is the rate of return on this stock if the current stock price is $38.56 a share:a. 6.81% b. 7.87% c. 7.04% d. 7.69% e. 7.82%

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  1. 25 June, 02:26
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    a. 6.81%

    Explanation:

    We know that

    Price of stock = Next year dividend : (Required rate of return - growth rate)

    where,

    Next year dividend would be

    = $1.27 + $1.27 * 3.4%

    = $1.27 + 0.04318

    = $1.3132

    The other items rate would remain same

    Now put these values to the above formula

    So, the value would equal to

    $38.56 = $1.3132 : (Required rate of return - 3.4%)

    (Required rate of return - 3.4%) = $1.3132 : $38.56

    (Required rate of return - 3.4%) = 3.41%

    So, the required rate of return would be

    = 3.41% + 3.4%

    = 6.81%
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