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

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))

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.

Explanation / Answer

Below is the detailed solution...

We need to find the dividend yield of each stock. To fing the components of total return we need to fing stock price of each stock. Using this value of stock price and dividend we can find dividend yield.

For stock W:

P0 = D0(1+g)/(R-g)

P0 = 3.80(1.10)/(0.20-0.10) = $41.8

Dividend Yield = D1/P0 = 3.80*1.10/41.8 = 0.1 = 10%

For stock X

P0 = D0(1+g)/(R-g)

P0 = 3.80/(0.20-0.0) = $19.0

Dividend Yield = D1/P0 = 3.80/19 = 0.20 = 20%

For stock Y

P0 = D0(1+g)/(R-g)

P0 = 3.80(1.00-0.05)/[0.20 - (-0.05)] = $14.44

Dividend Yield = D1/P0 = 3.80*0.95/14.44 = 0.25 = 25%

For stock Z:

To find the price of stock Z, we find the price of stock when the divedend level off at a constant growth rate, and then find present value of future stock price, plus the present value of all the devidends during supernatural growth period. The stock begins constant growth in year 3, so we can find the price of stock in year 2, one year before the constant dividend growth begins as:

P2 = D2(1+g)/(R-g)

P2= D0(1+g1)^2(1+g2)/(R-g) = 3.80*1.20^2*1.15/(0.20-0.15) = $125.86

The price of stock today is the present value of first three dividends, plus present value of year 3 stock price

P0 = $95

Dividend Yield = 0.048 = 4.8%

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