Question

The LetsStayHome Company expects their dividends and earnings to grow at a constant rate of 2% a year into the foreseeable future. Currently the market is requiring a 7.5% rate of return on their stock. The last, most recent dividend paid was $2.15/share.

a) What is the current price of the stock?b) (2 pts) what is the current capital gains yield on this stock?c) (2 pts) What is the current dividend yield on this stock?

Answer 1

The correct answer for option (a) is $39.87, for option (b) is 5.5% and for option (c) is 2%.

Step-by-step explanation:

According to the scenario, the computation of the given data are as follows:

(a). We can calculate the current price of the stock by using following formula:

Current price of stock = Dividend1 ÷ (Return rate - Growth rate)

Where Dividend1 = $2.15 × 1.02 = $2.193

So, Current price of stock = $2.193 ÷ ( 7.5% - 2%)

= $2.193 ÷ 5.5%

= $39.87

(b) Current capital gain yield = Dividend1 ÷ Current price of stock

= $2.193 ÷ 39.87

= 0.0550 or 5.5%

(c) Current dividend yield = Growth rate

AS growth rate = 2%

So, Current yield = 2%