Return on Common Stock You buy a share of The Ludwig Corporation stock for $21.8

Question

Return on Common Stock

You buy a share of The Ludwig Corporation stock for $21.80. You expect it to pay dividends of $1.01, $1.16, and $1.3323 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $28.02 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.

Explanation / Answer

a. The growth rate in dividend should be computed as follows:

Dividends for year 3 = $1.3323

Dividends for year 2 = $1.16

Growth in dividends = $1.3323 - $1.16 = $$0.1723

Growth rate in dividends = $0.1723 / $1.16 = 14.85%

b. Dividend yeild should be computed as follows:

Dividend for year 3 = $1.3323

Expected selling price at the end of year 3 = $28.02

Dividend yeild = $1.3323 / $28.02 = 4.75%

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