Question

You buy a share of The Ludwig Corporation stock for $22.20. You expect it to pay dividends of $1.03, $1.0867, and $1.1465 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $26.07 at the end of 3 years.Calculate the growth rate in dividends. Round your answer to two decimal places.

Answer 1

The growth rate in dividends for The Ludwig Corporation stock is calculated using the formula for growth rate and is approximately 5.58% when rounded to two decimal places.

Step-by-step explanation:

To calculate the growth rate in dividends, we need to apply the formula for the growth rate: g = (P3/P0)^(1/t) - 1, where P3 is the dividend in the third period, P0 is the dividend in the first period, and t is the number of periods between the two. Here P3 is $1.1465, P0 is $1.03, and t is 2 (since we're measuring from Year 1 to Year 3). Plugging in the numbers, we get: g = ($1.1465/$1.03)^(1/2) - 1, which equals approximately 0.0558 or 5.58% after rounding to two decimal places.