Question

Androscoggin Copper can grow at 5% per year for the indefinite future. It’s selling at $100, and next year’s dividend is $5. What is the expected rate of return from investing in Carrabasset Mining common stock? Carrabasset and Androscoggin shares are equally risky.

Answer 1

Answer:

10%

Explanation:

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

Expected rate of return = (Next year dividend ÷ selling price) + growth rate per year    

= (5 ÷ $100) + 5%

= 5% + 5%

= 10%

By considering all the elements that are given in the question i.e growth rate, selling price, and the next year dividend we can find out the expected rate of return i.e shown above