Question

The next dividend payment by Hoffman, Inc., will be $2.55 per share. The dividends are anticipated to maintain a groeth rate of 6 percent forever. Assume the stock currently selld for $48.70 per share.

Answer 1

The dividend yield is the dividend next year divided by the current price, so the dividend yield is:

Dividend yield = D1 / P0

Dividend yield = $2.55 / $48.70

Dividend yield = .0524, or 5.24%

The capital gains yield, or percentage increase in the stock price, is the same as the dividend growth rate, so:

Capital gains yield = 6%