Asked by Rainn Cline on Jun 28, 2024
Verified
The current yield on Zeta's common stock is 5.6%. The company pays a constant dividend of $1.80. What is the required rate of return on Zeta's stock?
A) 3.80%
B) 5.60%
C) 5.88%
D) 7.40%
E) 7.65%
Current Yield
The annual income (interest or dividends) divided by the current price of the security, often used to assess the return on investment in bonds.
Required Rate
The minimum expected rate of return by investors for providing capital to a company, often used in valuing investments.
Constant Dividend
A fixed amount of money paid to shareholders of a corporation out of its earnings on a regular basis.
- Calculate the market rate of return based on stock's current yield and constant dividends.
Verified Answer
RS
Rashuan SimonJul 02, 2024
Final Answer :
B
Explanation :
The current yield is essentially the return an investor would expect from the dividend relative to the price of the stock. Since the question states the current yield is 5.6%, and no other factors are introduced that would alter the return rate from the dividend, the required rate of return on Zeta's stock would also be 5.6%.
Learning Objectives
- Calculate the market rate of return based on stock's current yield and constant dividends.