You Buy A Share Of The Ludwig Corporation Stock For 1960

You Buy A Share Of The Ludwig Corporation Stock For 1960 You Expect

You buy a share of The Ludwig Corporation stock for $19.60. You expect it to pay dividends of $1.11, $1.1810, and $1.2566 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $23.61 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 (assume market is in equilibrium with the required rate of return equal to the expected return)? Do not round intermediate calculations. Round your answer to two decimal places. %

Paper For Above instruction

The Ludwig Corporation stock investment scenario provides an opportunity to analyze key financial metrics such as dividend growth rate, dividend yield, and total expected return. Understanding these elements offers valuable insights for investors aiming to optimize their portfolios based on expected returns and risk assessments. This analysis will involve calculations based on projected dividends, future stock price, and the assumptions of dividend growth continuity.

Calculating the Growth Rate in Dividends

The growth rate in dividends, often denoted as g, can be calculated using the formula for compound growth rate, considering the projected dividends over the period. Specifically, the dividend payments increase from $1.11 to $1.1810 and then to $1.2566 over three years. To determine the constant growth rate, we typically use the initial dividend and the third-year dividend, assuming a consistent growth rate across the years.

The formula for growth rate g is:

g = (D3 / D1)1/n - 1

where D3 is the dividend at year 3, D1 at year 1, and n is the number of years (which is 2 if growth is from Year 1 to Year 3).

Applying the data:

g = (1.2566 / 1.11)1/2 - 1

g = (1.1324)0.5 - 1

g ≈ 1.0638 - 1 = 0.0638, or 6.38%

Thus, the dividend growth rate is approximately 6.38%.

Calculating the Expected Dividend Yield

The dividend yield is calculated by dividing the dividend in year 1 by the current stock price:

Dividend yield = D1 / P0

= $1.11 / $19.60 ≈ 0.0566, or 5.66%

Therefore, the expected dividend yield is approximately 5.66%.

Calculating the Expected Total Rate of Return

Assuming the dividend growth rate remains constant, the total expected return (or the required rate of return) can be estimated by summing the dividend yield and the dividend growth rate:

Total return = Dividend yield + Growth rate

= 5.66% + 6.38% = 12.04%

This suggests that the stock's expected total rate of return is approximately 12.04%.

Estimating the Future Stock Price and Confirming the Return

Alternatively, one might consider the anticipated sale price of the stock after three years ($23.61) along with expected dividends to derive the same total return. Using the Dividend Discount Model (DDM), the expected return (r) can also be approximated by:

r ≈ (D1 / P0) + g ≈ 5.66% + 6.38% = 12.04%

This approximation aligns with the analytical approach, confirming the estimate of the combined return offered by dividends and capital appreciation.

Conclusion

In summary, based on the projected dividends and future stock sale price, the Ludwig Corporation's stock is expected to yield a total return of approximately 12.04%. This figure reflects the combined effect of dividend income and capital gains, assuming the dividend growth rate remains consistent over time. Investors should consider these metrics within the broader context of market conditions and company performance to make informed investment decisions.

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