Consider four different stocks, all of which have a required return of 12 percen
ID: 2760198 • Letter: C
Question
Consider four different stocks, all of which have a required return of 12 percent and a most recent dividend of $3.00 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 –4 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 10 percent growth rate thereafter.
What is the dividend yield for each of these four stocks?
What is the expected capital gains yield for each of these four stocks?
Consider four different stocks, all of which have a required return of 12 percent and a most recent dividend of $3.00 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 –4 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 10 percent growth rate thereafter.
Explanation / Answer
Current Price of the stock is = D1/(r-g)
We should calculate the Current stock price
D1 =3.00
r =12%
Stock W g = 10%
= 3.3/(.12-.10)
=165
Stock X
= 3/(.12-0)
=25
Stock Y
=2.88/(.12-(-.04))
=18
Stock W
First calculat the dividend after 2 years
= 3*(1.2)^3
=5.18
= 5.18/(.12-.10)
=259.2
=259/1.12^2
=206.63
We have to also add the presnet value of first two dividends
Dividend in first year 3.6
Dividend in seconf year4.32
Presnt value is equal to 6.6658
Value of stock = 213.29
Capital Hgain all the stock would be equal to there groth rate in next yeras
Stock w 10%
Stock x 0%
Stcok y -4%
Stock z 205
Stock price Dividend Dividend Yiekd W 165 3.3 2.00% X 25 3 12.00% Y 18 2.88 16.00% Z 213.29 3.6 1.69%Related Questions
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