Consider four different stocks, all of which have a required return of 19 percen
ID: 2636710 • Letter: C
Question
Consider four different stocks, all of which have a required return of 19 percent and most recent dividend of 4.50 per share. Stocks W, X and Y are expected to maintain constant growth rates in dividends for the foreseeable of 10 percent, 0 percent, and -5 percent per year, respectively. Stock Z is a growth stock and its dividend will increase by 20 percent for the next two years and then maintain a constant growth rate of 12 percent growth rate thereafter. What is the dividend yield for each of these stocks? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these stocks.
Explanation / Answer
Dividend yield = Recent dividend / share price
P0 = the stock price at time 0
For W = the stock price at time 0 is
Dividend is $ 4.50
Growth rate is 10%
Required return is 19%
Po = 4.50(1+0.10) / 0.19-0.10
Stock price = $55
Dividend yield = Recent dividend / share price
Dividend yield = 4.50/$55
= 0.081 or 8.18 %
For X = the stock price at time 0 is
Dividend is $ 4.50
Growth rate is 0%
Required return is 19%
Po = 4.50(1+0.00) / 0.19-0.00
Stock price = $23.68
Dividend yield = Recent dividend / share price
Dividend yield = 4.50/$23.68
= 0.19 or 19.00 % (No change)
For Y = the stock price at time 0 is
Dividend is $ 4.50
Growth rate is -5%
Required return is 19%
Po = 4.50(1+(-0.05)) / 0.19-(-0.05)
Stock price = $17.81
Dividend yield = Recent dividend / share price
Dividend yield = 4.50/$17.81
= 0.25 or 25.26 %
For Z = the stock price at time 0 is
Dividend is $ 4.50(1+20%) = $5.40
Growth rate is 12%
Required return is 19%
Po = $5.40(1+0.12) / 0.19-0.12)
Stock price = $86.4
Dividend yield = Recent dividend / share price
Dividend yield = 5.40/$86.4
= 0.062 or 6.25 %
capital gains yield is just add G to the dividend yield formuls
ie.. Dividend yield = Recent dividend / share price + G(Grouth %)
Thank you.................
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