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12 June, 03:12

The Hopkinton Company just paid $2.25 as its annual dividend. The dividends have been increasing at a rate of 5% annually and this trend is expected to continue. The stock is currently selling for $63.60 a share. What is the rate of return on this stock

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  1. 12 June, 03:23
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    8.54%

    Explanation:

    we need to determine the required rate of return using the perpetuity growth formula:

    stock price = dividend / (required rate of return - growth rate)

    $63.60 = $2.25 / (required rate of return - 5%)

    required rate of return - 5% = $2.25 / $63.60

    required rate of return - 5% = 3.54%

    required rate of return = 3.54% + 5% = 8.54%
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