Answer:
The expected totar return is: 8,625%
Explanation:
Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return is the amount of value an investor earns from a security over a specific period, typically one year.
The formula for the total stock return is the appreciation in the price plus any dividends paid, divided by the original price of the stock.
Total stock return= [(P1-P0)+D]/P0
P0: initial stock price
P1: Ending stock price (Period 1)
D0: dividend
In this case, we do not have P1. So we have to use an alternate version of the Gordon Growth Model. The GGM is mainly applied to value mature companies that are expected to grow at the same rate forever.
P= D1/(r-g)
where:
P=Current Stock Price
g=Constant growth rate in perpetuity
expected for the dividends
r=Constant cost of equity capital for that
company (or rate of return)
D1=Value of the next year’s dividends
By moving terms and isolating "r" we achieve the following formula:
r= D1/P+g
r=1,25/40+0,055= 8,625%
