Question

A stock is selling today for $50 per share. At the end of the year, it pays a dividend of $3 per share and sells for $56.

Required:

a. What is the total rate of return on the stock?

b. What are the dividend yield and percentage capital gain?

c. Now suppose the year-end stock price after the dividend is paid is $48. What are the dividend yield and percentage capital gain in this case?

Answer 1

Given,

Current price = $50

Expected dividend = $3

Price in one year = $56

Solution :-

(a)

Total rate of return = (Price in one year + expected dividend - current price) current price

= ($56 + $3 - $50) $50

= $9 $50 = 0.18 or 18%

(b)

Dividend yield = Expected dividend current price

= $3 $50 = 0.06 or 6%

Percentage capital gain = Total rate of return - dividend yield

= 18% - 6% = 12%

(c)

Price in one year = $48

Dividend yield would not change.

Dividend yield = 6%

Total rate of return = (price in one year + expected dividend - current price) current price

= ($48 + $3 - $50) $50

= $1 $50 = 0.02 or 2%

Percentage capital gain = Total rate of return - dividend yield

= 2% - 6% = -4%