Alaskan foodstuffs just announced the annual dividend for this coming year will be $0.36 a share and all future dividends are expected to increase by 4.5 percent annually. what is the market rate of return if the stock is currently selling for $12.20 a share?

The market rate of return is 7.45%

We follow these steps to find the answer.

Here we can interpret the term 'market rate of return' as the required rate of return on the stock. We represent this as

The current market price of stock (P₀), whose dividends are expected to grow for a constant rate is given by:

where

D = Upcoming dividend

k_{e} = required rate of return on the stock

g  = constant growth rate of dividends.

Plugging in the values from the question in the formula above we get,

answer; ( prices are sticky);