Question

Zero-Sum Enterprise expects to pay an annual dividend of $0.48 next year. Dividends and earnings have been growing at a compound annual rate of 8 percent and are expected to continue growing at that rate. What is the return on Zero-Sum if its price is $12?

Answer 1

To calculate the return on Zero-Sum with a current stock price of $12 and an expected annual dividend of $0.48 growing at 8%, the dividend yield is 4% and the expected return, which includes the growth rate, is 12%.

Step-by-step explanation:

The student's question relates to calculating the expected return from investing in a company's stock based on dividend growth and stock price. To find the return on Zero-Sum, which is expected to pay an annual dividend of $0.48 next year with dividends and earnings growing at a compound annual rate of 8%, and with a current stock price of $12, we need to calculate the dividend yield and expected growth.

The dividend yield is calculated as the annual dividend divided by the stock price. The expected return is the sum of the dividend yield and the growth rate. In this case:

• Dividend Yield = Annual Dividend / Stock Price = $0.48 / $12 = 0.04 or 4%
• Expected Return = Dividend Yield + Growth Rate = 4% + 8% = 12%

Therefore, the return on Zero-Sum is 12%.