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    Return on Common Stock

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    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.
    ? %

    © BrainMass Inc. brainmass.com December 24, 2021, 10:16 pm ad1c9bdddf
    https://brainmass.com/business/business-math/return-common-stock-457379

    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%

    c.

    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%

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 10:16 pm ad1c9bdddf>
    https://brainmass.com/business/business-math/return-common-stock-457379

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