Answer to Question #109255 in Financial Math for Jeneba Kosia

Question

If Negan Corp. common stock is valued at $40 per share, dividends are paid quarterly and expected to
grow quarterly by 1.2% forever, and the next dividend is due in 3 months and expected to be $3, then
what is the expected annual return on Negan Corp. stock?

Answer 1

find current profitability

$r+q=\frac{d}{P}=r+0.012=\frac{3}{40}$

r=0.063, 6,3%

find annual dividends:

1. $D=D1\times(1+q)^4=3\times(1+0.012)^4=3.146$

find the annual yield:

$r=\frac{d}{P}=\frac{3.146}{40}=0.07866$ , 7.87%