Question

In: Finance

A company has just paid a dividend of 3.73$. Its discount rate is 9.4%, and the...

A company has just paid a dividend of 3.73$. Its discount rate is 9.4%, and the expected perpetual growth rate is 4.8%. What is the stock's Capital Gain Yield?

Express your answer as a percentage but without the percentage sign, and rounded to 1 decimal. That is, if your answer is 0.035, which is 3.5%, then just type 3.5.

Expert Solution

Information provided:

Current dividend= $3.73

Discount rate= 9.4%

Growth rate= 4.8%

The question is solved using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

= $3.73*(1 + 0.048)/ 0.094 – 0.048

= 3.9090/ 0.0460

= $84.9783 $84.98.

Capital gains yield is calculated using the below formula:

Capital Gains Yield= Current price-original price/Original price*100

= $84.98 - $100/ $100*100

= -0.1502*100

= -15.02.

In case of any query, kindly comment on the solution

jeff jeffy answered 8 months ago

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