If D₁ = $1.25,g (which is constant)= 5.5%,and P₀ = $36,then what is the stock's expected total return for the coming year?

Question

Quizplus · Accepted Answer

The stock's expected total return can be calculated using the dividend discount model (DDM) formula for a constant growth stock, which is: Expected Total Return = Dividend Yield + Growth Rate. Given that D₁ = $1.25 is the dividend, and g = 5.5% is the growth rate, we first need to find the dividend yield. The current price (P0) is given as P₀ = $36. The dividend yield is then Dividend / Price = $1.25 / $36. The expected total return is therefore the sum of the dividend yield and the growth rate. Calculating the dividend yield gives us approximately 3.47%, and adding the growth rate of 5.5% gives us an expected total return of approximately 8.97%.

If D1 = $1

If D₁ = $1