Question

You buy a share of The Ludwig Corporation stock for $21.40. You expect it to pay dividends of $1.07, $1.1449, and $1.2250 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $26.22 at the end of 3 years.
A. Calculate the growth rate in dividends.
B. Calculate the expected dividend yield .
C. Assuming the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to get the expected total rate of return. What is the stock

Answer 1

Answer:

A. the growth rate in dividends = 7.00%

B. Expected dividend yield = 4.67%

C. Stock's xpected total rate of return = 11.67%

Explanation:

A. Calculate the growth rate in dividends

Current dividend growth rate = (Current year dividend - Previous year dividend) / Previous year dividend

Therefore,

Year 2 dividend growth rate = ($1.1449 - $1.07) / $1.07 = 0.0700, or 7.00%

Year 3 dividend growth rate = ($1.2250 - $1.1449) / $1.1449 = 0.0700, or 7.00%

This shows that;

Year 2 dividend growth rate = Year 3 dividend growth rate = 7.00%

B. Calculate the expected dividend yield

Dividend yield = Dividend per share / Market price per share

Therefore,

Expected dividend yield = Expected dividend per share in year 3 / Expected market price per share in year 3 = $1.2250 / $26.22 = 0.0467, or 4.67%

C. Assuming the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to get the expected total rate of return. What is the stock

Note: The complete statement is "What is this stock’s expected total rate of return?"

Stock's xpected total rate of return = Growth rate + Expected dividend yield in 3 = 7.00% + 4.67% = 11.67%.