You buy a share of The Ludwig Corporation stock for $23.20. You expect it to pay

Question

You buy a share of The Ludwig Corporation stock for $23.20. You expect it to pay dividends of $1.09, $1.14, and $1.1923 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $29.84 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

The dividend pattern is

Dividend in year 2 = dividend in year 1X (1+ growth rate)

Dividend in year 3 = diviidend in year 2 x (1+ growth rate)

1.14 = 1.09*(1+g)

so, g = 4.59%

Cross checking the answer

Dividend in year 3 should be = 1.14 *(1+ 4.59%) = 1.1923 (same as the question) so our answer is correct.

dividend yield is = (1.09+1.14+1.1923/23.20 )^1/3 =(1.14)^1/3 = 4.46%

Total expected return from the stock = dividend gain + price gain/ Initial price

                                                   = [1.09+1.14+`1.1923+ (29.84 - 23.20)]/23.20

                                                   = 9.4223/23.20

                                                    =(1.4061)^1/3 = 12.03% is the expected return for each year

Total return over 3 years is 40.61%

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