Calculating Expected Return on Stock | Dividends-R-Us

B

In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). In this case, g = 3%, D1 = Do*(1+g) = 3.1 * 1.03 = $3.193, Po = $12.45. Therefore, k =

28.65%

To calculate the expected return on a stock, we need to consider the dividend yield and the capital appreciation.

The dividend yield is calculated by dividing the annual dividend per share by the stock price. In this case, the cash dividend per share is $3.10. To find the annual dividend, we need to assume that the company maintains a constant dividend growth rate.

The formula to calculate the annual dividend is as follows:

Annual Dividend = Dividend per Share / (1 - Growth Rate)

Using the given values, the annual dividend can be calculated as follows:

Annual Dividend = $3.10 / (1 - 3%) = $3.10 / 0.97 = $3.1969 (approx.)

Next, we calculate the dividend yield:

Dividend Yield = Annual Dividend / Stock Price = $3.1969 / $12.45 ≈ 0.2569 (25.69%)

The capital appreciation is the growth rate of the stock price. In this case, the growth rate is given as 3%.

Therefore, the expected return on the stock is the sum of the dividend yield and the capital appreciation:

Expected Return = Dividend Yield + Growth Rate = 0.2569 + 3% = 0.2569 + 0.03 = 0.2869 (28.69%)

Now let's compare the calculated expected return with the answer choices provided:

A. 24.90% B. 28.65% C. 25.65% D. 27.90%

The closest answer to the calculated expected return of 28.69% is option B, 28.65%. Therefore, the correct answer is B. 28.65%.