Question

The next dividend payment by Wyatt, Inc., will be K2.30 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for K39.85 per share, what is the required return?

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

Answer 1

Solution:
a.	The required return = 10.27%
Working Notes:
	The required return r = (D1/P0) + g
	D1 = Next dividend = K2.30
	Growth (g) = 4.5%
	Current price of stock (P0) = K39.85
	The required return r = (D1/P0) + g
	r= (K2.30/K39.85) + 4.5%
	r= 0.0577164 + 4.5%
	r= 5.77164% + 4.5%
	r=10.27164%
	r=10.27%
b.	Dividend yield =5.77%
	Expected capital gains yield = 4.50%
Working Notes:
	Dividend yield = D1/P0
	Dividend yield = K2.30/K39.85
	Dividend yield = 0.0577164
	Dividend yield = 5.77164 %
	Dividend yield = 5.77 %
	Expected capital gains yield = % change in the stock price nearly equals to Dividend growth rate
	Expected capital gains yield = 4.50%
Please feel free to ask if anything about above solution in comment section of the question.