Question

Using the Dividend Discount Model, answer the following question: Aardvark, Inc. pays a constant annual dividend. At the end of trading on Wednesday, the price of its stock was $28. At the end of trading on the following day, the stock price was $27. As a result of the decline in the stock's price, the dividend yield _____ while the capital gains yield _____.

Answer 1

Dividend Discount Model

As a result of the decline in the stock's price, the dividend yield __increased___ while the capital gains yield __decreased___.

Step-by-step explanation:

The dividend yield will increase because with a constant annual dividend and a decreased stock price of $27, from the previous $28, the divisor has decreased, causing the yield rate to increase. For example, if the dividend per share remains at $5.00, the dividend yield, when the stock price was $28, will be equal to 17.9%. Now the yield will increase to 18.5%. On the other hand, the capital gains yield is based on the stock prices. Therefore, a reduction in the stock price will cause the yield to decrease and vice versa.