You buy a share of The Ludwig Corporation stock for $21.40. You expect it to pay

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 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

Explanation / Answer

Hi,

Please find the detailed answers as follows

Part A:

Growth Rate for Year 1 = (Dividend in Year 2 - Dividend in Year 1)/Dividend in Year 1 = (1.1449 - 1.07)/1.07 = 7%

Growth Rate for Year 2 = (Dividend in Year 3 - Dividend in Year 2)/Dividend in Year 2 = (1.2250 - 1.1449)/1.1449 = 7%

Part B:

Expected Dividend Yield = Dividend (Year 1)/Current Price*100 = 1.07/21.40*100 = 5%

Part C:

Total Rate of Return = D1/Current Stock Price + Growth Rate = 1.07/21.50 + .05 = 12%

Thanks.

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