7-15 Return on Common Stock You buy a share of The Ludwig Corporation stock for

Question

7-15

Return on Common Stock

You buy a share of The Ludwig Corporation stock for $21.20. You expect it to pay dividends of $1.11, $1.13, and $1.1504 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $27.63 at the end of 3 years. Calculate the growth rate in dividends. Round your answer to two decimal places. 1.80 % Calculate the expected dividend yield. Round your answer to two decimal places. 4.16 % 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

Growth rate in dividend= Final dividend- initial dividend/Initial dividend

=(1.13-1.11)/1.11*100

=1.80%

During 2nd and 3rd year

Growth rate=(1.1504-1.13)/1.13*100

Growth rate=1.80%

Dividend yield = annual dividend/stock price

=1.1504/27.63*100

Dividend yield=4.16%

the expected total rate of return= Dividend yield+grwoth rate

=4.16%+1.80%

The expected total rate of return=5.96%

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