Question

1. The next dividend payment by SAF, Inc., will be $4.20 per share. The dividends are anticipated to maintain a 5 percent growth rate, forever. If SAF stock currently sells for $62.00 per share, what is the required return?

1-1. For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?

Answer 1

Required return = (D1 / P0) + g

Required return = ($4.20 / $62.00) + 0.05

Required return = 0.1177 or 11.77%

Dividend yield = D1 / P0

Dividend yield = $4.20 / $62.00

Dividend yield = 0.0677 or 6.77%

Capital gains yield = Growth rate = 5.00%