Question

The Fly-By-Night Corp. paid a dividend of $2.85 last year and the dividend is expected to grow at 5% per year for the foreseeable future. The company’s stock is currently selling for $38 per share. What are the expected dividend yield, capital gains yield, and total expected return for Fly-By-Night.

Answer 1

Dividend last year=   2.85  
Growth rate=   5% or   0.05
Dividend next year (D1)= D0*(1+g)      
2.85*(1+0.05)=   2.9925  
Stock price =   38  

Required Return (ke) formula = D1/P0 + Growth rate      
(2.9925/38 ) + 0.05      
0.12875      

P1 or price at end = P0*(1+Growth)      
38*(1+0.05)=   39.9  
Dividend yield = D1/P0      
2.9925/38 =   0.07875   or 7.875%
      
Capital gain yield = (P1-P0)/P0      
(39.9 - 38)/38=   0.05   or 5%
      
Total Expected Return = Dividend yield + Capital gain yield      
0.07875 + 0.05 =   0.12875   or 12.875%
      
So Dividend yield is 7.875%, capital gain yield is 5% and Total yield is 12.875%