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?

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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 1 year ago

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