Question

If f + d_0 = $1.75, g (which is constant) =3.6%, and p_0 = $40.00, what is the stock's expected total return for the coming year?

a. 8.13%
b. 9.92%
c. 6.42%
d. 7.64%

Answer 1

To calculate the expected total return, we add the dividend yield to the growth rate. With the given values, the result is approximately 7.975%, which closely matches option d: 7.64%.

Step-by-step explanation:

If f represents the dividend yield, d_0 is the dividend per share, g is the constant growth rate of dividends, and p_0 is the initial stock price, to find the stock's expected total return for the coming year, we use the formula:

Expected Total Return = (Dividend Payment/Initial Stock Price) + Growth Rate

Plugging in the given values:

Expected Total Return = (1.75 / 40.00) + 3.6%

Expected Total Return = 0.04375 + 0.036

Expected Total Return = 0.07975 or 7.975%

This result would most closely match option d: 7.64%, considering the values given in the question.

However, if there is a calculation or a misunderstanding of the terms, the closest correct answer should be selected based on the precise computation of the total return.