The next dividend payment by Wyatt, Inc., will be $2.65 per share. The dividends

Question

The next dividend payment by Wyatt, Inc., will be $2.65 per share. The dividends are anticipated to maintain a growth rate of 6.50 percent, forever. Assume the stock currently sells for $48.90 per share.

What is the dividend yield? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

What is the expected capital gains yield? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

The next dividend payment by Wyatt, Inc., will be $2.65 per share. The dividends are anticipated to maintain a growth rate of 6.50 percent, forever. Assume the stock currently sells for $48.90 per share.

Explanation / Answer

Part a

Dividend Yield indicates the amount of dividend, a shareholder received as a percentage of stock's price. The formula for dividend yield is:

Dividend Yield = Annual Dividend/Stock Price*100. It is frequently stated as D1/P0, where D1 is the divided next year and P0 is the current stock price.

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Solution:

Using the value provided in the question:

Dividend Yield = 2.65/48.90*100 = 5.42%

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Part b)

Capital Gain Yield results from increase in the price of security over a particular period. It doesn't include the amount of dividend paid on the stock, therefore, we only consider the growth in price.

Under Gordon's Constant Growth Modet, the growth rate in dividends can directly be taken as the capital gain yield, since dividend is not to be considered in the calculation of capital gain yield.

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Solution:

Here, we have already been provided with the growth rate in the question itself.

Capital Gain Yield = Growth Rate = 6.50%

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