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    Dividend Yield & Capital Gains Yield for an Investor in the Club

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    The club auto parts company has recently organized. It is expected to experience no growth for the next 2 years as it identifies its market and acquires its inventory. However, club will grow at an annual rate of 5 percent in the third year and beginning with the fourth year, should attain a 10 percent growth rate which will sustain thereafter. The first dividend (D1) to be paid at the end of the 1st year is expected to be $0.50 per share. Investors require a 15 percent rate of return on club stock.

    Q: What dividend yield and capital gains yield should an investor in the Club expect for the first year?

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    Solution Preview

    Information given:
    1st two years, g = 0
    Year 5, g= 5%
    Year 6 >, g = 10%
    D1 = $ 0.50
    k = 15%

    Dividend Yield = Annual Dividends Per Share
    Price Per Share

    The constant growth model:(we need this to calculate the ...

    Solution Summary

    The solution determines the dividend yield and the capital gains yield.