Question

Krell Industries has a share price of $21.08 today. If Krell is expected to pay a dividend of $0.91 this year, and its stock price is expected to grow to $24.01 at the end of the year, then the dividend discount model (DDM) can be used to estimate the expected total return on the stock.

Answer 1

The expected total return on Krell Industries' stock, as estimated by the dividend discount model (DDM), is calculated using the formula: Total Return (%) = (0.91 / 21.08) + (24.01 - 21.08) / 21.08. After performing the calculations, the expected total return is approximately 16.15%.

Step-by-step explanation:

To calculate the expected total return using the DDM, we use the formula: Total Return (%) = (Dividend / Current Stock Price) + (Expected Stock Price - Current Stock Price) / Current Stock Price. Plugging in the given values, we get Total Return (%) = (0.91 / 21.08) + (24.01 - 21.08) / 21.08. After performing the calculations, the expected total return is approximately 16.15%.

This means that investors can anticipate a total return of around 16.15% on their investment in Krell Industries' stock, considering both the dividend yield and the expected capital gain. The DDM is a commonly used method for estimating the expected return on a stock by taking into account the dividend payments and the anticipated growth in the stock's price. Investors often use such models to make informed decisions about their investment portfolios, weighing factors like dividend income and potential capital appreciation.