Answer:
The expected rate of return is 14.29%.
Explanation:
The re-arranged equation of DDM for Expected Rate of Return is given below:
Expected Rate = (Next Year Dividend / Current Stock Price) + Growth Rate
where
Next Year Dividend is Current Year Dividend * (1 + growth rate)
⇒ Next Year Dividend = 2.05 * (1 + 6.50%) = $2.18.
All the other values are given in the question. Simply put those values in the equation:
⇒ Expected Rate of Return = (2.18 /28) + .065 = .1429 = 14.29%.
