Consider four different stocks, all of which have a required return of 18.75 per

Question

Consider four different stocks, all of which have a required return of 18.75 percent and a most recent dividend of $3.45 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10.5 percent, 0 percent, and -5.25 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20.75 percent for the next two years and then maintain a constant 12.5 percent growth rate, thereafter.

Requirement 1:
What is the dividend yield for each of these four stocks? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

   Dividend yield
Stock W  
10.5
%
Stock X  
0
%
Stock Y  
%
Stock Z  
%
Requirement 2:
What is the expected capital gains yield for each of these four stocks? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Round your answers to 2 decimal places (e.g., 32.16).)

   Capital
gains yield
Stock W  
%   
Stock X  
%   
Stock Y  
%   
Stock Z  
%   

Explanation / Answer

Stock Stock W Stock X Stock Y Stock Z Recent Dividend 3.45 3.45 3.45 3.45 Constant Growth rate 10.50% 0% -5.25% Expected Dividend 3.81225 3.45 3.2689 Stock price 46.21 18.40 13.62 Dividend yield 8.25% 18.75% 24.00% Stock price =Expected Dividend/(Required rate-growth rate) Price of stock Z Cash pv Present Year flows factor Value 1 4.1659 0.8889 3.703 2 5.0303 0.7901 3.9746 3 90.55 0.7023 63.596 Total 71.274 Curent price of Stock Z = 71.27 Dividend Yield = 3.45 x 1.2075/71.27 = 5.84% Value of share after 2 year =[ 5.0303 x (1+0.125)]/(18.75-12.50) =90.55 Answer W 8.25% X 18.75% Y 24.00% Z 5.84% Part 2 Previous stock price: Stock Stock W Stock X Stock Y Stock Z Recent Dividend 3.45 3.45 3.45 3.45 Constant Growth rate 10.50% 0% -5.25% Stock price 41.82 18.40 14.38 Stock price =Expected Dividend/(Required rate-growth rate) Price of stock Z Cash pv Present Year flows factor Value 1 3.45 0.8889 3.0667 2 4.1659 0.7901 3.2916 3 5.0303 0.7023 3.5329 4 90.55 0.6243 56.53 Total 63.354 Capital Gain Expected PreVious Gain or Price Price (Loss) W             46.21    41.82      4.39 X             18.40    18.40           -   Y             13.62    14.38    (0.75) Z             71.24    63.35      7.89

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