One year ago you bought a share of Bavarian Sausage stock for $46.50. During the year...

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Finance

One year ago you bought a share of Bavarian Sausage stock for$46.50. During the year the stock paid a $2.75 dividend. You havedecided to sell the stock exactly one year after the purchase(today). If dividends are growing at 4% and therequired rate of return is 9.42%, what is the percentage return ofyour stock investment?
a.
5.91%
b.
13.44%
c.
26.69%
d.
19.39%

Answer & Explanation Solved by verified expert

4.3 Ratings (871 Votes)

Price of the stock in one year is calculated with the help of the dividend discount model.

It is calculated using the below formula:

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of the stock today= $2.75*(1 + 0.04)/ 0.0942 – 0.04

= $2.86/ 0.0542

= $52.7675

Profit/Loss on stock investment= Ending stock price + Stock dividend – Beginning stock price

= ($52.7675 + $2.75) - $46.50

= $55.5175 - $46.50

= $9.0175

Return on stock investment= Profit/ Beginning stock price *100

= $9.0175/ $46.50 *100

= 0.1939*100

= 19.39%.

Hence, the answer is option d.

In case of any query, kindly comment on the solution.

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Transcribed Image Text

One year ago you bought a share of Bavarian Sausage stock for$46.50. During the year the stock paid a $2.75 dividend. You havedecided to sell the stock exactly one year after the purchase(today). If dividends are growing at 4% and therequired rate of return is 9.42%, what is the percentage return ofyour stock investment?a.5.91%b.13.44%c.26.69%d.19.39%