You buy a share of The Ludwig Corporation stock for $20.70. You expect it to pay

Question

You buy a share of The Ludwig Corporation stock for $20.70. You expect it to pay dividends of $1.05, $1.17, and $1.3037 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $31.12 at the end of 3 years. 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

Answer :-

Buy Stock = $ 20.7

Yield = 15 + [(23.13 - 20.7) / (23.13 - 20.46)] * (20 - 15)

= 15 + [ 2.43 / 2.67 ] * 5

= 15 + 4.55

= 19.55%

Years Dividend & Stock Price Assume PVIF at 20% Value Assume PVIF at 15% Value 1 1.05 .833 .875 .87 .914 2 1.17 .694 .812 .756 .885 3 1.3037 + 31.12 .579 18.773 .658 21.33 TOTAL 20.46 23.13

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