A stock closed at $62 per share. Based on the last 12 months, the stock had a P/E ratio of 11 and a dividend per share of $1.40. Earnings are expected to grow at an 8% compound rate. Since the company recently raised their dividend, they are not expected to change their dividend during the next two years. However, for the third year they will raise their dividend to a 36% payout ratio based on earnings in the third year. With anticipated improved market conditions, the P/E ratio at the end of the third year is expected to be 14.2.
a. If an investor purchases the stock at $62 and holds it for 3 years before selling, what percent annual rate of return can the investor expect to obtain?
b. The rate of return calculated in part (a) is cimposed of returns due to dividends and price appreciation (capital gain). What is the rate of return due to dividends and the rate of return due to price appreciation.