Johnstown Supply Corporation stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 next year.

Johnstown Supply Corporation stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 next year. Dividends are expected to grow at a constant rate of 7.5% indefinitely. Compute the required rate of return on Johnstown Supply Corporation stock. What is the dividend yield? What is the capital gains yield?

Expert Solution

As per Dividend Growth Model,

Required rate of return = Dividend in next year / Current share price + Growth rate

Dividend in next year = $5.00

Current price = $58.00

Growth rate = 7.5% = 0.075

Now we can calculate the required return on the srock

Required return
= 5 / 58 + 0.075
= 16.12%

Capital gain yield will be equal to the growth rate in constant growth model. Capital gain yield = 7.5%

Dividend yield = Dividend / stock price = 5/58 = 8.62%

jeff jeffy answered 2 years ago

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