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Dividend, Stock Price, Dividend Yield and Capital Gains Rate

ABC and Co has come out with an new product, and the world is beating a path to its door. As a result, the firm projects growth of 20 percent per year for four years. By then, other firms will have copycat technology, competition will drive down profit margins, and the sustainable growth rate will fall to 5 percent and remain at that level thereafter. The most recent annual dividend was D0 = \$1.00 per share.

1. What are the expected values of dividends in years 1, 2, 3, and 4?

2. What is the expected stock price 4 years from now? The discount rate is 10 percent.

3. What is the stock price today?

4. Find the expected dividend yield.

5. What is the expected capital gains rate?

Solution Preview

1. What are the expected values of dividends in years 1, 2, 3, & 4?

D1 = 1.00(1+0.2) = 1.20

D2 = 1.44 D3 = 1.73 D4 = 2.07

2. What is the ...

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