If a stock pays a $3.00 dividend, has a market price of $27, and a growth rate of 5%, what is the expected return?

To determine the expected return on a stock given the parameters of a dividend payment, current market price, and growth rate, we can apply the Gordon Growth Model (also known as the Dividend Discount Model). This model is represented by the formula:

Expected Return = (Dividend / Price) + Growth Rate

In this scenario, the stock pays a dividend of $3.00, the market price is $27, and the growth rate is 5% (or 0.05).

1. Calculate the dividend yield: Dividend Yield = Dividend / Price = $3.00 / $27 ≈ 0.1111 or 11.11%.

2. Add the growth rate to the dividend yield to find the expected return: Expected Return = Dividend Yield + Growth Rate Expected Return = 11.11% + 5% = 16.11%.

Therefore, the expected return, taking into account both the dividend yield and the growth rate, is 16.11%. This reflects the total return an investor might anticipate from holding the stock, combining both the income from dividends and the appreciation of the stock's value due to growth.