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 total return for the stock is

Question

Quizplus · Accepted Answer

The total return for the stock includes both the dividend yield and the capital gains yield. The dividend for 2008 is expected to be $1.331. The growth rate of the dividend can be calculated based on the given data: from $1.000 to $1.100 is a 10% increase, from $1.100 to $1.210 is also a 10% increase, and from $1.210 to $1.331 is again a 10% increase. Thus, the dividends are growing at a constant rate of 10% per year. The current market price is $20.000, so the dividend yield is $1.331 / $20.000 = 6.655%. Since the dividends are growing at a 10% rate, and the dividend yield is approximately 6.655%, the total expected return is the sum of the dividend yield and the growth rate, which is 6.655% + 10% = 16.655%, rounded to 16.67%.

Data for a Share of Common Stock of ABC Company