Fed Ex common stock currently trades at $51.00 and its most recent annual dividend was $1.40. On...

Question:

Fed Ex common stock currently trades at $51.00 and its most recent annual dividend was $1.40. On Sunday night, FedEx issued a press release indicating that future years' dividends will continue to grow at 3.0%, a little in excess of historical inflation.

What is the market rate of return of this stock?

Dividend:

Dividend refers to the sum of cash or stock distributed by the company to its shareholders. A dividend is the portion of the company's net income, which was earned from the operating activity.

Answer and Explanation:

We can calculate the market rate of return of the stock using the following formula:

{eq}\begin{align*} Required~return&=Constant~growth~rate+\frac{Dividend}{Stock~price}\\ &=.03+\frac{1.4}{51}\\ &=.03+.02745\\ &=.05745 \end{align*} {/eq}

The market rate of return of the stock is 5.745%


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.8K

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