An analyst has gathered the following data to analyze a stock.

• Current stock price: $20.
• Expected price at the end of the next period: $22.
• Current period earnings: $2.
• Expected next period's earnings: $2.2.
• Stable earnings growth rate to infinity: 6%.
• Stable payout ratio: 50%.
• Beta: 1.2.
• Required rate of return: 12%.

Suppose now is the end of the current period. What is the expected rate of return for the next period?

Correct Answer: Expected rate of return = (End of period value + dividend) / (start of period value) - 1 = (22 + 2.2 x 50%) / 20 - 1 = 15.5%.