Consider four different stocks, all of which have a required return of 20 percen
ID: 2780918 • Letter: C
Question
Consider four different stocks, all of which have a required return of 20 percent and a most recent dividend of $3.80 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 15 percent growth rate thereafter What is the dividend yield for each of these four stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place, e.g., 32.1.) Dividend vield 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 "O" wherever required. Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place, e.g., 32.1.) Capital gains yield Stock W Stock X Stock Y Stock ZExplanation / Answer
Stock W: P0= D0(1 +g) / (Rg) = 3.8*1.1/(0.2-0.1) = 41.8
Dividend Yield = D1/P0 = 3.8*1.1/41.8 = 0.1
Capital Gain Yield = 0.2 - 0.1 = 0.1
Stock X: P0= D0(1 +g) / (Rg) = 3.8*1/(0.2-0) = 19
Dividend Yield = D1/P0 = 3.8*1/19 = 0.2
Capital Gain Yield = 0.2 - 0.2 = 0.0
Stock Y: P0= D0(1 +g) / (Rg) = 3.8*0.95/(0.2+0.05) = 14.44
Dividend Yield = D1/P0 = 3.8*0.95/14.44 = 0.25
Capital Gain Yield = 0.2 - 0.25 = -0.05
Stock Z:
P2 = D2(1 +g) / (R–g) = D0(1 +g1)2(1 +g2)/(R–g2) = 3.80(1.20)2(1.15)/(0.20 – 0.15) = 125.86
P0= 3.80*(1.20) / (1.20) + 3.80*(1.20)2/ (1.20)2+ 125.86/(1.20)2= 80.43
Dividend yield = D1/P0= 3.80(1.20)/80.43 = 0.047
Capital gains yield = .20 – .047 = 0.153
RJW Enterprises
Dividend Yield = Dividend/Stock Price
0.025 = 1.4/P0
Hence P0 = 1.4/0.025 = 56
The “Net Chg” of the stock shows the stock decreased by 0.33 on this day, so the closing stock price yesterday was:Yesterday’s closing price = 56 – (–0.33) = 56.33
PE = Stock price / EPS
15 = 56/EPS
EPS = 56/15 = 3.73
EPS = Net income / Shares
Net Income = EPS x Shares = 3.73 x 17,000,000 = 63,466,666.67
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