You buy a share of The Ludwig Corporation stock for $23.90. You expect it to pay dividends of $1.08, $1.13, and $1.1823 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $29.89 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.
SOLUTION This solution is FREE courtesy of BrainMass!
a. Growth rates
from year 1 to year 2 => (1.13 - 1.08)/1.08 = 0.0463 = 4.63%
from year 2 to year 3 => (1.1823 - 1.13)/1.13 = 4.63%
b. Dividend yields
Dividend yield = current dividend/current price = 1.08/23.90 = 0.0452 = 4.52%
Using the discount dividend model, we know that price = dividend/(rate of return - growth rate)
23.90 = 1.08/(r - 0.0463) => r = 0.0915 = 9.15%
total rate of return is 9.15%© BrainMass Inc. brainmass.com December 24, 2021, 10:16 pm ad1c9bdddf>