Consider four different stocks, all of which have a required return of 18.00 per

Question

Consider four different stocks, all of which have a required return of 18.00 percent and a most recent dividend of $3.55 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 11.5 percent, 0 percent, and -6.00 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20.00 percent for the next two years and then maintain a constant 13.5 percent growth rate, thereafter. *************ALL I NEED HELP WITH IS Stock Z, -What is the dividend yield for each of STOCK Z?? -What is the expected capital gains yield for STOCK Z???

Explanation / Answer

stock Z

re=18%

Do=3.55

Price Po=3.55*(1.2)/1.18 + 3.55*(1.2^2)/1.18^2 + (3.55*(1.2^2)*(1.135)/(.18-.135))/1.18^2

= $ 99.88

dividend yield = D1/Po = 3.55*1.2/99.88 = 4.27%

P1 = 3.55*(1.2^2)/1.18+ (3.55*(1.2^2)*(1.135)/(.18-.135))/1.18

= $ 113.6

capital gains yield = (P1-Po)/Po*100% = (113.6-99.88)/99.88*100% = 13.73%

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