You buy a share of The Ludwig Corporation stock for $18.60. You expect it to pay

Question

You buy a share of The Ludwig Corporation stock for $18.60. You expect it to pay dividends of $1.09, $1.17, and $1.2559 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $31.90 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) Calculate the growth rate in dividends. Round your answer to two decimal places.

Growth rate in dividends = (Expected Dividend in Year 3 /Expected Dividend in Year 1)^(1/2) -1

Growth rate in dividends = (1.2559/1.09)^(1/2) - 1

Growth rate in dividends = 7.34%

b) Calculate the expected dividend yield. Round your answer to two decimal places.

Expected dividend yield = D1/P0

Expected dividend yield = 1.09/18.60

Expected dividend yield = 5.86%

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.

Stock's expected total rate of return = Growth rate in dividends+Expected dividend yield

Stock's expected total rate of return = 7.34 + 5.86

Stock's expected total rate of return = 13.20%

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