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Gordon Corporation's stock is expected to pay a dividend of $4 per share at the end of this year. The dividend is expected to grow at a constant rate of 7%. The stock is currently selling for $100 per share. What would be the investor's expected rate of return on the stock

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Answer: 11%

Explanation:

Using the Gordon Growth Model, the price of a stock is:

= Next dividend / (Expected return - Growth rate)

The growth rate will therefore be:

100 = 4 / (r - 7%)

(r - 7%) * 100 = 4

r - 7% = 4 /100

r = 4% + 7%

= 11%

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