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?

a. Expected rate of return = 10%

b. Expected rate of return = 12%

Explanation:

Using dividend growth model we have,

where P = Current market price

D = Dividend at the year end

K = Expected return

g = growth rate

Putting values in the above we have,

a. $64 =

=

K = 0.07 + 0.03 = 0.1 = 10%

b. $64 =

=

K = 0.07 + 0.05 = 0.12 = 12%

Final Answer

a. Expected rate of return = 10%

b. Expected rate of return = 12%

i would say a certificate of deposit, so you're not locked into a long term, and it has more security than a mutual fund.

the answerr would be 1