Consider four different stocks, all of which have a required return of 20 percen

ID: 2701937 • Letter: C

Question

Consider four different stocks, all of which have a required return of 20 percent and a most recent dividend of $3.80 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 percent, and %u20135 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20 percent for the next two years and then maintain a constant 15 percent growth rate thereafter.

What is the dividend yield for each of these four stocks? (Do not round intermediate calculations and round your final answers to 1 decimal places. (e.g., 32.1))

What is the expected capital gains yield for each of these four stocks? (Leave no cells blank - be certain to enter "0" wherever required. Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 1 decimal places. (e.g., 32.1))

Explanation / Answer

stock W:

Po = 3.80 * 1.1/(0.2-0.1) = 41.8

Dividend yield = 3.80 * 1.1/41.8 = 10%

capital gain yield = 20% -10% = 10%

stock x:

Po = 3.80 /(0.2-0.00) = 19

Dividend yield = 3.80 /19 = 20%

capital gain yield = 20% -20% = 0%

stock Y:

Po = 3.80 * 0.95/(0.2+0.05) = 14.44

Dividend yield = 3.80 * 0.95/14.44 = 25%

capital gain yield = 20% -25% = -5%

stock Z:

P2 = 3.80 * 1.2^2*1.15/(0.2-0.15) = 125.86

Po = 3.8 * 1.2/1.2 + 3.8 * 1.2^2/1.2 + 125.86/1.12^2 = 108.70

Dividend yield = 3.80 * 1.2/108.70 = 4.20%

capital gain yield = 20% -4.20% = 15.8%

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Consider four different stocks, all of which have a required return of 19 percen

Consider four different stocks, all of which have a required return of 20 percen

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Consider four different stocks, all of which have a required return of 20 percen

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