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

Answer:

Dividend Yield = Dividend/Current Market price = $2.65/$48.9 = 0.0542 = 5.42%

Expected Capital gains yield = (Next year's share price - Current market price) / Current market price

Next year's share price = Dividend in year 2 / (Required rate of return - Growth rate)

= (Dividend in year 1 * Growth rate) / (Required rate of return - Growth rate)

= $2.65(1+0.065) / (0.12 - 0.065) (assuming Required rate of return = 12%)

= $2.822/0.055 = $51.31

Expected Capital gains yield = ($50.31 - 48.90)/48.9 = 2.88% (ans)

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