next expected dividend for Stock P is 10 and the current price of the stock is P40. The risk free rate is 5%, the market risk premium is 8%, and the stock's beta is 1. What is the expected rate of return? What is the required rate of return? Why should an investor buy this stock?

next expected dividend for Stock P is 10 and the current price of the stock is P40. The risk free rate is 5%, the market risk premium is 8%, and the stock's beta is 1. What is the expected rate of return? What is the required rate of return? Why should an investor buy this stock?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P

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Concept explainers

Stock Yields

The stock yield is otherwise known as the dividend yield. The dividend yield is an annual payment of the stock dividends to the holder of a firm’s stock. The dividend yield is a financial ratio to measure the value of dividend payout every year for the relative stock price. The yield of a stock is usually shown in a percentage that discloses the expected future earnings from stock depending on the current stock price in the future. Stock yield will change depending on the market fluctuations and in accordance with the market fluctuations, the dividends will be increased or decreased by the firm.

Question

The next expected dividend for Stock P is 10 and the current price of the stock is P40. The risk free rate is 5%, the market risk premium is 8%, and the stock's beta is 1.

What is the expected rate of return?
What is the required rate of return?
Why should an investor buy this stock?

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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