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You buy a share of The Ludwig Corporation stock for $21.20. You expect it to pay dividends of...

Question:

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.

_____ %

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

_____%

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.

Dividend yield:

Dividend yield is calculated as the annual dividend payments to shareholders as a percentage of the stock price.

Dividend Yield = Dividend per share / Market value per share

Dividend yield is used to evaluate the stock performance as it is a component of total return.

Answer and Explanation:

Calculate the growth rate in dividends. Round your answer to two decimal places.

Dividend table:

Year

Dividend(Dn)

Growth rate (D-D0)/D0

1

$ 1.1100

 

2

$ 1.1300

1.80%

3

$ 1.1504

1.81%

Average dividend growth rate = (1.80% +1.81%)= 1.81%

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

Dividend yield at year 3 = $ 1.1504/$27.63 =4.26%

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.

Expected total rate of return = dividend yield + growth rate = 1.81% + 4.26% = 6.07%


Learn more about this topic:

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What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
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