The common stock of Sweet Treats is selling for $53.75 per share. The company is expected to have an annual dividend increase of 4.2 percent indefinitely and pay a dividend of $4.20 in one year. What is the total return on this stock?
Question
The common stock of Sweet Treats is selling for 4.20 in one year. What is the total return on this stock?
Solution
To calculate the total return on the stock, we need to consider both the dividend yield and the capital gains yield (which is the same as the growth rate in this case).
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First, calculate the dividend yield. This is the dividend payment divided by the price of the stock.
Dividend Yield = Dividend Payment / Price of the Stock Dividend Yield = 53.75 = 0.0781 or 7.81%
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The capital gains yield is given as the annual dividend increase, which is 4.2%.
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The total return is the sum of the dividend yield and the capital gains yield.
Total Return = Dividend Yield + Capital Gains Yield Total Return = 7.81% + 4.2% = 12.01%
So, the total return on the Sweet Treats stock is 12.01%.
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