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

Answer:

= 33.37%

Explanation:

The computation of expected annual return is given below:-

Price of common stock today = Dividend next year ÷ (Required rate of return - Growth rate)

= $42 = $3 ÷ (required rate of return - 1.2%)

= (required rate of return -1.2%) = 0.071429

= (required rate of return - 1.2%) = 7.1429%

Required rate of return = 8.3429%

Expected of Annual Return = Required rate of return × Quarterly

= 8.3429% × 4

= 33.3716%

or

= 33.37%

So, for computing the expected of annual return we simply multiply the required rate of return with quarterly.