Return on common stock You buy a share of The Redskins Corporation stock for $21

Question

Return on common stock You buy a share of The Redskins Corporation stock for $21.04. You expect it to pay dividends of $1.07, $1.1342, and $1.202252 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $25.06 at the end of 3 years.
a. Calculate the growth rate in dividends.
b. Calculate the expected dividend yield.
c. Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to the expected total rate of return. What is this stock’s expected total rate of return?

Explanation / Answer

1) Calculating the dividends growth rate: The growth rate from year-1 to year-2 is         ($1.1342 - $1.07) / $1.07 = 0.06 or 6% The growth rate from year-2 to year-3 is         ($1.2022 - $1.1342) / $1.1342 = 6% Therefore, the dividend growth rate is 6% in the years 1,2 &3. 2) Calculating the expected Dividend yield : The formula for calculating the expected dividend yield is                         Expected Dividend yield = D1 / P0                                                               Where D1 is the Dividend yield in the year-1 = $1.07            P0 is the price of the stock in year-0 = $21.04 Substituting the values in the above formula. we get                                    Expected Dividend yield = $1.07 / $21.04                                                            = 0.051 or 5.1% Therefore, the expected Dividend yield is 5.1% 3) Calculating the expected total return on the stock: Expected total return = Expected Dividend yield + Expected Growth rate                                  = 5.1% + 6%                                  = 11.1% Therefore, the expected total return is 11.1%

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