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 $3.40 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 –5 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 12 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))

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

PRICE = (D0 + G) / (KE -G)

WHERE D0 = DIVIDEND AT O YEAR

G = GROWTH RATE

KE = COST OF EQUITY OR REQUIRED RETURN

FOR STOCK W

PRICE = (3.4 + 10%) / (20%-10%)

PRICE FOR W = $ 37.4

FOR STOCK X

PRICE = (3.4 + 0%) / (20%-0%)

PRICE FOR X = $ 17

FOR STOCK Y

PRICE = (3.4 + (-5%) ) / (20%-(-5%) )

PRICE FOR Y = $ 12.92

FOR STOCK Z

PRICE = [ (3.4+20%) * 0.833 ]+ [ (4.08 +20%) * 0.694] + { [ (4.90 + 12%) * (20%-12%)] * 0.694 }

         = 3.398 + 3.398 + 47.61

PRICE FOR Z = 54.41

DIVIDEND YEILD = DIVIDEND FOR THE PERIOD / INITIAL PRICE FOR THE PERIOD

FOR W = (3.74/37.4 ) * 100

DIVIDEND YEILD OF W = 10%

FOR X = (3.4 /17) *100

DIVIDEND YEILD OF X = 20%

FOR Y = (3.23/12.92) *100

DIVIDEND YEILD OF Y = 25%

FOR Z = ( 5.49/ 54.41)*100

DIVIDEND YEILD OF Z = 10.1%

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