Question

Consider four different stocks, all of which have a required return of 18 percent and a most recent dividend of $3.55 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 11.5 percent, 0 percent, and –6 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 13.5 percent growth rate, thereafter.

  
What is the dividend yield for each of these four stocks? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
  

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

  
What is the expected capital gains yield for each of these four stocks? (A negative answer should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
  

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

Answer 1

For calculating capital yield and dividend yield we will first calculate stock price

The value of a constant growth stock can be determined using the following equation:

PO=D0(1+g)/R-g

• P₀ = the stock price at time 0,
• D₀ = the current dividend,
• D₁ = the next dividend (i.e., at time 1),
• g = the growth rate in dividends, and
• r = the required return on the stock, and
• g < r.

W=3.55(1+11.5)/18-11.5

     =3.55(1.115)/.065

     =3.95825/.065

    =$60.8961538

X=3.55(1+0)/18-0

   =3.55/.18

   =19.722222

Y=3.55(1-.06)/ (.18+.06)

     =3.55×.94/.24

      =13.90416666

Z=DO (1+go) (1+go) (1+g1)/(R-g1)

=3.55(1.20) (1.20) (1.135)/ (.18-.135)

=5.80212/.045

=128.936

Po=3.55(1+.20)/1.18+3.55 (1.20)(1.20)/1.18×1.18+128.936/1.18×1.18

    =3.610169+5.112/1.3924+92.599827

    =99.88135

CALCULATION OF DIVIDENT YEILD AND CAPITAL YEILD

Dividend Yield =D1/PO

WHERE D1=DO (1+g)

W=3.55(1+.115)/ 60.8961538=.065=6.5%

X=3.55(1+0)/ 19.722222=.18000=18%

Y=3.55(1-.06)/ 13.90416666=.24000=24%

Z=3.55(1+.20)/99.88135=.04265=4.265%

Capital yield=

W=18%-6.5%=11.5%

x=18%-18%=0

Y=18%-24%=-6%

Z=18%-4.265%=13.735%

	Dividend yield
Stock W	6.5%
Stock X	18%
Stock Y	24%
Stock Z	4.265%

	Capital gains yield
Stock W	11.5%
Stock X	0%
Stock Y	-6%
Stock Z	13.735%