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**CFA Practice Question**

A stock is priced $25 at the beginning the year. The market's expected rate of return on the stock is 10%. It pays a dividend of $2 at the end of the year. To meet the market's expected rate of return, the price of the stock at the end of the year has to be:

A. $25

B. $25.5

C. $27.5

**Explanation:**The total value to the investor will be 10%, that is $2.50. This return is divided into dividend and capital gains. Dividend is $2, so capital gains must be $0.50.

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**User Contributed Comments**
3

User |
Comment |
---|---|

chantal |
I prefer the following explanation: (P1-P0(25$)+2$)/ P0(25$)= 10% expected return P1= 25.5$ |

Clude |
Expected return= capital gain yield + div yield. Div yield= 2/25= 0.08. So capital gain = 10%-0.08=0.02 So stock price in 1 yr=25*(1+0.02) |

moneyguy |
Thanks, both of you. |