Data for a share of common stock of ABC Company appear below:
Dividend: 2005 actual $ 1.000
2006 actual 1.100
2007 actual 1.210
2008 expected 1.331
Current market price per share: $20.000
Assuming the dividend pattern above will continue in the future and also assuming that it is the first of January,2008,the estimated future return for the stock is

Question

Quizplus · Accepted Answer

The estimated future return for the stock can be calculated using the dividend growth model, which is given by the formula: Return = (Dividend for Next Year / Current Market Price) + Growth Rate. The dividends are growing at a rate of 10% annually (as seen from the progression from $1.000 to $1.100 to $1.210). The dividend expected for 2008 is $1.331, and the current market price is $20.000. Therefore, the estimated return = ($1.331 / $20.000) + 10% = 0.06655 + 0.10 = 16.655% or approximately 16.67%. However, the correct calculation should consider the dividend growth rate as part of the return, not add it separately after dividing the next year's dividend by the current price. The correct approach is to recognize that the growth rate is already factored into the future dividends, and the question seems to ask for the total return including dividend yield and growth, which was incorrectly calculated in the explanation. The correct answer should reflect the dividend yield based on the next year's dividend and the growth rate, but the provided explanation and answer choice do not align correctly with standard financial formulas or interpretations.

Data for a Share of Common Stock of ABC Company