A stock sells for $25 with a general forecast of D1 = $1.25. You forecast D1 will be $1.40. If there is complete convergence, your one year rate of return would be

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Quizplus · Accepted Answer

The expected rate of return is calculated by adding the dividend yield to the capital gains yield. The dividend yield is $1.40 / $25 = 5.6%. If the stock price converges to the forecasted dividend, the capital gains yield is 12% (since $1.40 is 12% higher than $1.25). Therefore, the total expected return is 5.6% + 12% = 17.6%.

A Stock Sells for $25 with a General Forecast of D1