You are considering the purchase of a stock that is currently selling at $ 64 per share.

Question:

You are considering the purchase of a stock that is currently selling at $ 64 per share. You expect the stock to pay $ 4.50 in dividends next year.
a. If dividends are expected to grow at a constant rate of 3 percent per year, what is your expected rate of return on this stock?
b. If dividends are expected to grow at a constant rate of 5 percent per year, what is your expected rate of return on this stock?
c. What do your answers to parts (a) and (b) say about the impact of growth rates on the expected rate of return on stocks?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...