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?

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%