Expected and Required Returns, Equation (page 399) k=D1 + (P1 - P0)/P0
The Duncan Company's stock is currently selling for $ 15. People generally expect its price to rise to $ 18 by the end of next year. They also expect that it will pay a dividend of $. 50 per share during the year. (Hint: Apply Equation 9.2 page 399).
a. What is the expected return on an investment in Duncan's stock?
b. Recalculate the expected return if next year's price is forecast to be only $ 17 and the dividend $. 25.
c. Calculate the actual return on Duncan if at the end of the year the price turns out to be $ 13 and the dividend actually paid was just $. 10.