currently a share of stock is paying a dividend (cash payout, c) of $4.00, which will be paid before the end…

currently a share of stock is paying a dividend (cash payout, c) of $4.00, which will be paid before the end of the year and has a known selling price (in one year), $p_{t + 1}$, of $26.50. the expected return, r, of similar assets is 8.0% and the current market price is $25.00. what is the total rate of return, r, on this asset?\ntotal rate of return = % (round your response to one decimal place.)\ndo you expect the price of this stock to increase, decrease, or remain unchanged?

currently a share of stock is paying a dividend (cash payout, c) of $4.00, which will be paid before the end of the year and has a known selling price (in one year), $p_{t + 1}$, of $26.50. the expected return, r, of similar assets is 8.0% and the current market price is $25.00. what is the total rate of return, r, on this asset?\ntotal rate of return = % (round your response to one decimal place.)\ndo you expect the price of this stock to increase, decrease, or remain unchanged?

Answer

Explanation:

Step1: Calculate the total return amount

The total return amount is the sum of the dividend and the capital gain. The capital gain is (P_{t + 1}-P_{t}), where (P_{t}) is the current price and (P_{t+1}) is the price in one - year. The dividend (C = 4), (P_{t}=25), (P_{t + 1}=26.5) The total return amount (=C+(P_{t + 1}-P_{t})=4+(26.5 - 25)=4 + 1.5=5.5)

Step2: Calculate the total rate of return

The formula for the total rate of return (R=\frac{C+(P_{t + 1}-P_{t})}{P_{t}}\times100%) Substitute the values: (R=\frac{5.5}{25}\times 100%=22%)

Step3: Compare with the expected return of similar assets

The expected return of similar assets is (8%). Since the actual return ((22%)) of this stock is higher than the expected return of similar assets, investors will demand this stock. According to the law of supply and demand, when demand increases, the price of the stock will increase.

Answer:

Total Rate of Return (=22.0%) The price of this stock is expected to increase.