Buy shares stock for $23.10. Expecting it to pay dividends of $1.09, 1.16, and 1
ID: 2642778 • Letter: B
Question
Buy shares stock for $23.10. Expecting it to pay dividends of $1.09, 1.16, and 1.2345 in years 1,2,and 3 expecting to sell it at price of 30.82 at the end of three years. Calculate the growth rate in dividends? Calculate the expected dividend yield and assuming that the calculated growth rate is expected to continue add the dividend yield to expected growth rate to obtain the expected total rate of return for stock? Buy shares stock for $23.10. Expecting it to pay dividends of $1.09, 1.16, and 1.2345 in years 1,2,and 3 expecting to sell it at price of 30.82 at the end of three years. Calculate the growth rate in dividends? Calculate the expected dividend yield and assuming that the calculated growth rate is expected to continue add the dividend yield to expected growth rate to obtain the expected total rate of return for stock?Explanation / Answer
Growth rate in dividends (from year 1 to year 2) = (1.16-1.09)/1.09 = 6.42%
Growth rate in dividends (from year 2 to year 3) = (1.2345-1.16)/1.16 = 6.42%
2 year CAGR growth rate: using the compounding formula =
1.2345 = 1.09 (1+r)^2 where r is the growth rate. Solving we get r as 6.42%
Dividend yield (assuming the price to be 23.10 at year 1) = 1.09/23.1 = 4.71%
Now price has grown to 30.82 so cagr rate of price growth: 30.82 = 23.1*(1+r)^2. Solving we get r as 15.5%
Thus price at year 2 = 23.1*(1+15.5%) = 26.7 and price at year 3 = 30.82. so dividend yield at year 2 = 1.16/26.7 = 4.34% and dividend yield for year 3 = 1.2345/30.82 = 4%
Total dividends = 1.09+1.16+1.2345 = 3.4845. Gain in sale of share = 30.82-23.1 = 7.72.
Total return = total dividends+gain in sale of share = 3.4845+7.72 = 11.2045. Thus total return of stock = 11.2045/23.1 (i.e the initial buying price) = 48.5%
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