Question

If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $43, what is the stock's expected total return for the coming year? Select the correct answer. 8.61% 8.41% 8.21% 8.81% 8.01%

Answer 1

Expected return=(D1/Current price)+Growth rate

=(1.25/43)+0.055

which is equal to

=8.41%(Approx).

Answer 2

Calculation:

The total return consists of two parts: the dividend yield and the capital gains yield.

1. Dividend Yield:

   $$\text{Dividend Yield}=\frac{D1}{P0}=\frac{\mathrm{\$}1.25}{\mathrm{\$}43}=0.02907\text{ or }2.907\mathrm{\%}$$

2. Capital Gains Yield (Growth Rate):

   $$\text{Capital Gains Yield}=g=5.5\mathrm{\%}$$

3. Total Expected Return:

   $$\text{Total Return}=\text{Dividend Yield}+\text{Capital Gains Yield}=2.907\mathrm{\%}+5.5\mathrm{\%}=8.407\mathrm{\%}\approx 8.41\mathrm{\%}$$

The correct answer from the options provided is 8.41%

Answer:
               The stock's expected total return for the coming year is 8.41%.