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Last year, when the stock of Alpha Minerals was selling for $49.50 a share, the dividend yield was 3.4 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.2 percent?

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akindeleot

Answer:

Total return on this stock is 0.06395 or 63.95%

Explanation:

Calculating the total return

P₀ = [D₀ * (1 + g)] / [r - g]

$41 = [($49.50 * 3.4%) * (1 + 2.2%)] / [r - 2.2%]

$41 * [r - 0.022] = [(49.50 * 0.034) * (1 + 0.022)]

$41 * [r - 0.022] = [(1.683) * (1.022)]

$41 * [r - 0.022] = 1.720026

r - 0.022 = 1.720026 / 41

r - 0.022 = 0.04195

r = 0.04195 + 0.022

r = 0.06395‬

In percentage; r = 63.95%

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