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 $4.30 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 11 percent growth rate thereafter.

What is the dividend yield for each of these four stocks? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Dividend yield

Stock W %

Stock X %

Stock Y %

Stock Z %

What is the expected capital gains yield for each of these four stocks? (Leave no cells blank - be certain to enter "0" wherever required. A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Capital gains yield

Stock W %

Stock X %

Stock Y %

Stock Z %

Explanation / Answer

First let us find the price of all the 4 stocks

Price= Do*(1+g)/(k-G)

Stock W:

Price=4.3*(1+10%)/(20%-10%)

=47.3

Stock X:

Price=4.3*(1+0%)/(20%-10%)

=43

Stock Y:

Price=4.3*(1-5%)/(20%-10%)

=40.85

Stock Z:

=(4.3*(1+20%)/((1+20%)^1))+ (4.3*(1+20%)^2/((1+20%)^2))+ (4.3*(1+20%)^2*(1+11%))/(20%-11%))/((1+20%)^2))

=52.79

Dividedn yield= Dividend next year/price of the stock

W: (4.3*(1+10%))/47.3=10%

X:= (4.3*(1+0%))/43=10%

Y=(4.3*(1-50%))/40.85=10%

Z=(4.3*(1+20%))/52.79=9.77%

Capital gain yield=required return-dividend yield

W=20%-10%=10%
X=20%-10%=10%
Y=20%-10%=10%
Z=20%-9.77%=10.23%

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