You buy a share of The Ludwig Corporation stock for $22.30. You expect it to pay

Question

You buy a share of The Ludwig Corporation stock for $22.30. You expect it to pay dividends of $1.01, $1.15, and $1.3094 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $29.62 at the end of 3 years. Calculate the growth rate in dividends. Round your answer to two decimal places. 4.53 % 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? Round your answer to two decimal places.

Explanation / Answer

Solution: 1) Dividend Growth Rate Year1 Year2 Year3 $1.01 $1.15 $1.31 Year2-Year1/Year1 $0.15 $0.31 - Total of Year1 & Year2 Dividends pay $0.46 2) Dividend yield (Stock) = Dividend / Price D= Dividends for the period $                              0.46 P = Initial price for the period $22.30 Dividend yield (Stock) = Dividend / Price 2.06% 4.53 % Calculate the expected dividend yield = 2.06* 4.53% 0.09% 3) Total Stock Rate of Return = (P1 - P0) + D/ P0 P0 = Initial Stock Price = $22.30 $22.30 P1 = Ending Stock Price = $29.62 $29.62 D = Dividends = $1.01 + $1.15 + $1.31 $                              3.47 Total Stock Rate of Return = ($3.85) -17.26% At the end of 3years -5.75%

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