You buy a share of The Ludwig Corporation stock for $23.80. You expect it to pay

Question

You buy a share of The Ludwig Corporation stock for $23.80. You expect it to pay dividends of $1.10, $1.14, and $1.1815 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $30.95 at the end of 3 years.

Calculate the growth rate in dividends. Round your answer to two decimal places. %

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

a.

Dividend at year 1 = $1.10

Dividend at year 2 = $1.14

Growth rate = (Dividend at year 2 – Dividend at year 1)/Dividend at year 1 = ($1.14-$1.10)/$1.10 = $0.04/$1.10 = 0.0364 = 3.64%

b.

Expected Dividend yield = Expected Dividend / Purchase price

Expected dividend yield for year 1 = Dividend at year 1 / Purchase price = $1.10/$23.80 = 0.0462 = 4.62%

Expected dividend yield for year 2 = Dividend at year 2 / Purchase price = $1.14/$23.80 = 0.0479 = 4.79%

Expected dividend yield for year 3 = Dividend at year 3 / Purchase price = $1.1815/$23.80 = 0.0496 = 4.96%

c.

Stock price = Next year dividend / (Total return – Growth rate)

Stock price at year 3 = Dividend at year 4 / (Total return – Growth rate)

Dividend at year 4 = Dividend at year 3 * (1 + Growth rate) = $1.1815 * 1.0364 = $1.2245

$30.95 = $1.2245 / (Total return – 0.0364)

Total return – 0.0364 = $1.2245/$30.95 = 0.0396

Total return = 0.0396 + 0.0364 = 0.076 = 7.60%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.