Question

If d0 = $1.75, g (which is constant) = 3.6%, and p0 = $32.00, what is the stock's expected total return for the coming year?
a. 8.37%
b. 8.59%
c. 9.27%
d. 9.03%
e. 8.81%

Answer 1

Find $D_{1}$ using formula

$D_{1} = D_{0} (1+g)$---------------------------------(1)

Now g = 3.6 % = $\frac{3.6}{100} =0.036$

So plug 0.036 in g place, 1.75 in $D_{0}$ place in formula given by (1)

$D_{1} = 1.75(1 + 0.036)$

$D_{1} = 1.75(1.036)$

$D_{1} = 1.813$--------------------------------(2)

Now dividend yield is given by formula:

$\frac{D_{1}}{P_{0}}$

So plug $D_{1}$ as 1.813 and $P_{0}$ value as 32 in formula above

so we get dividend yield = $\frac{1.813}{32} = 0.05665$

dividend yield % will be = 0.05665 × 100 = 5.665 %

Expected total return will be = dividend yield + g

= 5.665 % + 3.6%

= 9.265%

Round it to two decimal places so we get 9.27% as final answer for return

So choice (c) 9.27% is the right answer