Question

Consider four different stocks, all of which have a required return of 20 percent and a most recent dividend of $4.90 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 percent, and –5 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20 percent for the next two years and then maintain a constant 15 percent growth rate thereafter.

  

What is the dividend yield for each of these four stocks? (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place, e.g., 32.1.)

	Dividend yield
Stock W	%
Stock X	%
Stock Y	%
Stock Z	%

What is the expected capital gains yield for each of these four stocks? (Leave no cells blank - be certain to enter "0" wherever required. Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place, e.g., 32.1.)

	Capital gains yield
Stock W	%
Stock X	%
Stock Y	%
Stock Z	%

Answer 1

Dividend yield

Required return, R = 20%= 0.20

Current dividend, D0 = $4.90 per share

1) for stock W

Growth rate of dividend, g = 10% = 0.10

Current price , P0 = D0*(1+g)/(R-g) = [4.90*(1.10)]/(0.20-0.10) = 5.39/0.1 = $53.9

Dividend yield = [D0*(1+g)]/P0 = [4.90*(1.10)]/53.9 = 5.39/53.9 = 0.10 = 10%

2) for stock X

Growth rate of dividend, g = 0

Current price , P0 = D0/(R) = [4.90]/(0.20) = $24.5

Dividend yield = [D0]/P0 = [4.90]/24.5 = 0.20 = 20%

3) for stock Y

Growth rate of dividend, g = -5% = -0.05

Current price , P0 = D0*(1-0.05)/(R+0.05) = [4.90*(0.95)]/(0.25) = $18.62

Dividend yield = [D0*(1+g)]/P0 = [4.90*(1-0.05)]/18.62 = 0.25 = 25%

4) for stock Z

Growth rate of dividend after 2 years, g = 15% = 0.15

Current price , P0 = D0*(1+g)/(R-g) = [4.90*(1.15)]/(0.20-0.15) = 112.7

Dividend yield = [D0*(1+g)]/P0 = [4.90*(1.15)]/112.7 = 0.05 = 5%

Capital Gains Yield

1) for stock W

Capital gains yield = Required return - Dividend yield = 20% - 10% = 10%

2) for stock X

Capital gains yield = Required return - Dividend yield = 20% - 20% = 0

3) for stock Y

Capital gains yield = Required return - Dividend yield = 20% - 25% = -5%

4) for stock Z

Capital gains yield = Required return - Dividend yield = 20% - 5% = 15%