Question

If D1=$2, g (which is constant) =7.3%, and P0=$52, what is the stock's expected capital gains yield for the coming year?

A.7.5%
B.7.7%
C.7.1%
D.7.3%
E.6.9%

Answer 1

The stock's expected capital gains yield for the coming year is -3.45%

Step-by-step explanation:

The stock's expected capital gains yield for the coming year can be calculated using the formula:

Capital Gains Yield = (D1/P0) - g

where D1 is the dividend expected to be received next year, P0 is the stock price at the beginning of the year, and g is the constant growth rate.

From the given information, D1 = $2, P0 = $52, and g = 7.3%.

Therefore, the expected capital gains yield can be calculated as:

Capital Gains Yield = (2/52) - 0.073 = 0.0385 - 0.073 = -0.0345 or -3.45%

Based on this calculation, the stock's expected capital gains yield for the coming year is -3.45%, which means it is expected to have a negative capital gains yield.