You buy a share of The Ludwig Corporation stock for $19.90. You expect it to pay

Question

You buy a share of The Ludwig Corporation stock for $19.90. You expect it to pay dividends of $1.07, $1.16, and $1.2576 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $31.81 at the end of 3 years. a.Calculate the growth rate in dividends. Round your answer to two decimal places. ? % b.Calculate the expected dividend yield. Round your answer to two decimal places. ? % 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's expected total rate of return? Round your answer to two decimal places. ? %

Explanation / Answer

P = 19.9
D1 = 1.07
D2 = 1.16
D3 = 1.2576

price in 3 years = 31.81

a.
growth of dividend = D2/D1 -1 = D3/D2 -1 = 1.16/1.07 -1 = 8.41%

b.
expected dividend yield = D1/P = 1.07/19.9 = 5.38%

c.
total rate of return = expected growth + dividend yield = 8.41% + 5.38% = 13.79%

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