Question: You are considering the purchase of a stock that is currently selling at $64 per share. You expect the stock to pay $4.50 in dividends next year.
a. If dividends are expected to grow at a constant rate of 3 percent per year, what is your expected rate of return on this stock?
b. If dividends are expected to grow at a constant rate of 5 percent per year, what is your expected rate of return on this stock?
c. What do your answers to parts (a) and (b) say about the impact of dividend growth rates on expected rate of returns on stocks?