Question

You buy a share of The Ludwig Corporation stock for $21.30. You expect it to pay dividends of $1.10, $1.15, and $1.2023 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $27.48 at the end of 3 years.
Calculate the growth rate in dividends. Round your answer to two decimal places.
%

Calculate the expected dividend yield. Round your answer to two decimal places.
%

Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock's expected total rate of return (assume market is in equilibrium with the required rate of return equal to the expected return)? Do not round intermediate calculations. Round your answer to two decimal places.
%

Answer 1

Answer:

A) 4.55%

B)5.16%

C)9.71%

Explanation:

A) Determine the Growth rate in Dividends as follows

Actually, by using any two successive years, the growth rate in dividends can be compted as follows

The formula is as follows (Year 3 dividend- Year 2 Dividend)/ Year 2 Dividend x 100

Year 2 and 3 =  [($1.2023 - $1.15) / $1.15] x 100 = 4.55%

B) Determine the expected Dividend Yield as follows:

The formula is as follows:

Year 1 Dividend / The Price of Stock = $1.10 / $21.30 = 0.0516 or 5.16%

C) COmpute the Expected Total Rate of Return

The formula is as follows:

Dividend Yield (Calculated in B) + Growth Rate (Calculated in A)

= 5.16% + 4.55% = 9.71%