Question

For Stock XXX, D₁ = $1.50, g (which is constant) = 6.5%, and P₀ = $56. Stock XXX's expected capital gains yield for the coming year is closest to:

	a.	6.50%
	b.	7.17%
	c.	7.52%

Answer 1

Step 1: Find the expected rate of return

Where,
ER = Expected rate of return
D₁ = Expected dividend in year 1
P₀ = Current price
g = constant dividend growth rate in decimal form (i.e 6.5% = 0.065)

Therefore,

OR

Step 2: Find D₂:

D2 = D1 + (g * D1)
=1.5 + 0.0975
= $1.5975

Step 3: Find the price of the stock at year 1 (P₁):

Step 4: Find expected capital gains yield:

OR