If DO = $1.75, g (which is constant) = 3.6%, and PO = $31.00, what is the stock's expected total...

Question:

If DO = $1.75, g (which is constant) = 3.6%, and PO = $31.00, what is the stock's expected total return for the coming year?

a. 9.45%

b. 10.87%

c. 7.75%

d. 9.64%

e. 10.49%

Dividend Growth Model:

The dividend growth model determines the current price of the stock by discounting the future dividends expected from the stock assumed to grow at a constant rate. The dividend growth model can also be used to determine the required return, provided the current price of the stock is given.

Answer and Explanation:


Correct answer: Option a) 9.45%.

Explanation:

As per the data:

  • D0 = $1.75
  • Constant growth rate, g = 3.6%
  • P0 = $31
  • Expected return, r =?

Computation:

As per the dividend growth model:

  • r = (D1 / P0) + g
  • r = ($1.81 / $31) + 3.6%
  • r = 9.45%

Working note:

  • D1 = D0 * (1 + g)
  • D1 = $1.75 * (1 + 3.6%)
  • D1 = $1.81

Learn more about this topic:

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Required Rate of Return (RRR): Formula & Calculation

from Financial Accounting: Help and Review

Chapter 1 / Lesson 31
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