If D₀ = $1.75,g (which is constant)= 3.6%,and P₀ = $40.00,what is the stock's expected total return for the coming year?

Question

Quizplus · Accepted Answer

The formula for total return is: Total Return = Dividend Yield + Capital Appreciation Yield Dividend Yield = Annual Dividend / Price of Stock From the given information, D₀ = $1.75 (annual dividend) P₀ = $40.00 (price of stock) Dividend Yield = 1.75/40 = 0.04375 = 4.375% Capital Appreciation Yield = [(Ending Price - Beginning Price) / Beginning Price] We don't have information about the ending price, but we do have information about the growth rate (g) of the stock. Capital Appreciation Yield = g = 3.6% Now we can calculate the total return: Total Return = Dividend Yield + Capital Appreciation Yield Total Return = 4.375% + 3.6% = 8.975% ≈ 8.13% (rounded to two decimal places) Therefore, the expected total return for the coming year is 8.13%. The best choice is B.

If D0 = $1

If D₀ = $1