A firm's current share price is $40, with an expected growth rate of 11 percent and an expected dividend per share (D1) of $2. Considering its risk, your required rate of return is 12 percent. Your expected rate of return and associated investment decision options are: A) 10 percent – do not buy B) 12 percent – do not buy C) 14 percent – buy D) 16 percent – buy E) 18 percent – buy

 The expected rate of return on a stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model), when we assume that dividends grow at a constant rate indefinitely. The formula for this model is:

Expected Rate of Return = (D1 / P0) + g

where: - D1 is the expected dividend per share one year from now - P0 is the current share price - g is the expected growth rate of dividends

Using the given values: D1 = $2 P0 = $40 g = 11% or 0.11 in decimal

Let's calculate the expected rate of return:

Expected Rate of Return = (2 / 40) + 0.11 = 0.05 + 0.11 = 0.16 or 16%

Now, compare the expected rate of return to the required rate of return, which is 12%. If the expected rate of return is higher than the required rate of return, it is generally considered a good investment decision.

Given your expected rate of return is 16%, and your required rate of return is 12%, the appropriate investment decision would be:

D) 16 percent – buy

Because the expected rate of return exceeds your required rate of return, it indicates that the stock's expected performance should compensate for its risk, making it a potentially good investment.