Question

1. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year?

Answer 1

The question is solved using the dividend discount model.

Information provided:

Next year’s dividend= $1.25

Dividend growth rate= 5.5%

Current share price= $44

It is calculated using the below formula:

Ke=D1/Po+g

where:

D1= Next year’s dividend

Po=Current stock price

g=Firm’s growth rate

Ke= $1.25/ $44 + 0.055

     = 0.0284 + 0.055

     = 0.0834*100

     = 8.34%.

Therefore, the stock’s expected total return for the coming year is 8.34%.