Asked by Vivian Ramirez on May 13, 2024
Verified
B.C.Inc.(BCI) pays an annual dividend of $2 per share.If BCI's stock is currently trading at $53 per share,and BCI's expected growth rate is 5%,what is BCI's expected return?
A) 3.78%
B) 8.77%
C) 15.77%
D) 28.09%
Expected Return
The weighted average of all possible returns for an investment, considering the probabilities of each outcome.
Annual Dividend
The total dividend payment a company makes to its shareholders in a year, often derived from its net income.
Growth Rate
The rate at which a company's earnings, revenue, or other financial metric increases on a year-to-year basis.
- Understand the methodology for calculating expected return on a stock.
- Identify factors influencing stock prices and returns.
- Apply mathematical formulas to determine stock valuation and expected return.
Verified Answer
AU
Amarjot UppalMay 18, 2024
Final Answer :
B
Explanation :
BCI's expected return can be calculated using the dividend discount model (DDM) as follows:
Expected Return = Dividend Yield + Growth Rate
Dividend Yield = Annual Dividend / Stock Price
Dividend Yield = $2 / $53 = 0.0377 or 3.77%
Growth Rate = 5%
Expected Return = 3.77% + 5% = 8.77%
Therefore, the best choice is B, which is the closest value to the calculated expected return (8.77%).
Expected Return = Dividend Yield + Growth Rate
Dividend Yield = Annual Dividend / Stock Price
Dividend Yield = $2 / $53 = 0.0377 or 3.77%
Growth Rate = 5%
Expected Return = 3.77% + 5% = 8.77%
Therefore, the best choice is B, which is the closest value to the calculated expected return (8.77%).
Learning Objectives
- Understand the methodology for calculating expected return on a stock.
- Identify factors influencing stock prices and returns.
- Apply mathematical formulas to determine stock valuation and expected return.
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