Question

The next dividend payment by Savitz, Inc., will be $1.44 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. The stock currently sells for $26 per share.

a. What is the dividend yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b. What is the expected capital gains yield? (Enter your answer as a percent.)

Answer 1

Dividend yield = 5.54%

The expected capital gains yield = 6%

Step-by-step explanation:

Next Dividend (D1) = $1.44

Growth rate (g) = 6%

Required return (Ke) = 6% + 5.54% = 11.54%

Ke-g = 11.54% - 6% = 5.54%

Price = D1 / (ke / g) = 1.44 / 5.54% = $25.9927 = $26

a. Dividend yield = D1 / Price = $1.44 / $26

Dividend yield = 0.05538

Dividend yield = 0.0554

Dividend yield = 5.54%

b. The expected capital gains yield = Required return (Ke) - Dividend yield

The expected capital gains yield = 11.54% - 5.54%

The expected capital gains yield = 6%