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Bet'R Bilt Bikes just announced that its annual dividend for this coming year will be $2.42 a share and that all future dividends are expected to increase by 2.5% annually. What is the market rate of return if this stock is currently selling for $22 a share?

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Answer:

13.50%

Explanation:

The computation of the market rate of return is shown below:

Current selling price for share = Annual dividend ÷ (Market rate of return - growth rate)

$22 = $2.42 ÷ (Market rate of return - 2.5%)

(Market rate of return - 2.5%) = $2.42 ÷ $22

(Market rate of return - 2.5%) = 11%

So, the market rate of return would be

= 11% + 2.5%

= 13.50%