Answer:
The stock's expected rate of return is 19.00%
Explanation:
The price per share of a stock whose dividends grow by a constant rate forever is calculated using the constant growth model of the DDM approach.
The formula for price today under this model is,
P0 = D0 * (1+g) / (r - g)
As we know the price today along with the growth rate and the dividend last year or D0, we can plug in these values to calculate the expected/required rate of return or r.
40 = 2.5 * (1+0.12) / (r - 0.12)
40 * (r - 0.12) = 2.8
40r - 4.8 = 2.8
40r = 2.8 + 4.8
r = 7.6 / 40
r = 0.19 or 19%
