Question

Expected Return Ecolap Inc. (ECL) recently paid a $0.50 dividend. The dividend is expected to grow at a 12 percent rate. At a current stock price of $11.20, what is the return shareholders are expecting? First convert D0 to D1 then use equation:

expected return = I = D1+g

                                  _____

                                    p0

Answer 1

Expected Return on the Stock

Dividend per share for the current year (D0) = $0.50 per share

Current Share Price (P0) = $11.20 per share

Dividend Growth Rate (g) = 12% per year

Dividend per share for the next year (D1)

Dividend per share for the next year (D1) = D0 x (1 + g)

= $0.50 per share x (1 + 0.12)

= $0.50 per share x 1.12

= $0.56 per share

Therefore, the Expected Return on the Stock = (D1 / P0) + g

= ($0.56 / $11.20) + 0.12

= 0.05 + 0.12

= 0.17 or

= 17%

“Hence, the Expected Return on the Stock will be 17%”