Question

If D1=$5, g (which is constant) =2.4%, and PO=$197, what is the stock's expected capital gains yield for the coming year?

A.2.5%
B.2.8%
C.2.6%
D.2.4%
E.2.7%

Answer 1

To calculate the stock's expected capital gains yield, use the formula: (Expected Stock Price - Current Stock Price) / Current Stock Price. In this case, the expected yield is 1.52%.

Step-by-step explanation:

To calculate the stock's expected capital gains yield for the coming year, we need to use the formula:

Expected Capital Gains Yield = (Expected Stock Price - Current Stock Price) / Current Stock Price

First, we need to calculate the expected stock price using the constant growth formula:

Expected Stock Price = Current Stock Price * (1 + g)

Given the values D1=$5, g=2.4%, and PO=$197, we can calculate:

Expected Stock Price = $197 * (1 + 0.024) = $200.0

Next, substitute the values into the first formula:

Expected Capital Gains Yield = ($200.0 - $197) / $197 = 0.015228

Finally, convert the decimal to a percentage:

Expected Capital Gains Yield = 0.015228 * 100% = 1.5228%

Therefore, the stock's expected capital gains yield for the coming year is approximately 1.52%.