Consider four different stocks,all of which have a required return of 18 percent and a most recent dividend of $4.50 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 stock? What is the expected capital gains yield? Discuss the relationship among the various return that you find for each of these stocks.

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Consider four different stocks,all of which have a required return of 18 percent and a most recent dividend of $4.50 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 stock? What is the expected capital gains yield? Discuss the relationship among the various return that you find for each of these stocks.

We will calculate the stock price now and 1year later to calculate the capital gains

1) Stock W

Price at time t=0
Po= Div1/ (r-g)
Div0 = $4.50

Dividend for next year= Div1 = $4.95 =(1+10.%) *4.5
Cost of equity= r= 18%
growth rate of dividends/earnings= g= 10%
Current stock price= Po=
Plugging in the values:
Po= $61.8750 =4.95/(18.%-10.%)

Price at time t=1
Po= Div1/ (r-g)
Div1 = $4.95

Dividend for next year= Div2 = $5.445 =(1+10.%) *4.95
Cost ...

Solution Summary

The solution calculates capital gains yield and dividend yield of different stocks

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