Problem 7-15 Return on Common Stock You buy a share of The Ludwig Corporation st
ID: 2819873 • Letter: P
Question
Problem 7-15 Return on Common Stock You buy a share of The Ludwig Corporation stock for $19.70. You expect it to pay dividends of $1.00, $1.15, and $1.3225 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $27.32 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 s expected total rate of return (assume market is in equilibrium to obtain the expected total rate of return. What is this stock' with the required rate of return equal to the expected return)? Do not round intermediate calculations. Round your answer to two decimal places.Explanation / Answer
a). The growth rate of stock can be calculated using formula:
g = [(D1 - D0 ) / D0 ] * 100
g = [(1.15 - 1.00) / 1.00] * 100 = 15.00%
b). The expected dividend yield is DPS / MPS, that is:
= [1.00 / 19.70] * 100 = 5.07%
c). The stock's expected total rate of return is:
= D1/ P0 + g
= $1.00 / $19.70 + 15%
= 5.07% + 15.00% = 20.07%