Return on Common Stock You buy a share of The Ludwig Corporation stock for $23.4

Question

Return on Common Stock

You buy a share of The Ludwig Corporation stock for $23.40. You expect it to pay dividends of $1.08, $1.16, and $1.2459 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $27.71 at the end of 3 years.

Calculate the growth rate in dividends. ___%

Calculate the expected dividend yield. ___%

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? ___%

Explanation / Answer

1) growth rate in dividends:

growth rate for the 2nd year = (1.16/1.08) - 1 = 0.074 = 7.4%

growth rate for the 3rd year =(1.2459/1.16) - 1 = 0.074 = 7.40%

Therefore, average rate of growth in dividends = 7.40%

2) expected dividend yield = 1.08/23.4 = 0.0462 = 4.62%

3) expected total rate of return = 7.4 + 4.62 = 12.02%

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