Question

Consider four different stocks, all of which have a required return of 14 percent and a most recent dividend of $3.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 percent, and –6 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20 percent for the next two years and then maintain a constant 12 percent growth rate thereafter. What is the dividend yield for each of these four stocks? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) What is the expected capital gains yield for each of these four stocks? (Leave no cells blank - be certain to enter "0" wherever required. A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The dividend yield for each stock is calculated by dividing the dividends per share by the stock price. The expected capital gains yield is calculated by subtracting the dividend yield from the required return.

Step-by-step explanation:

Dividend yield is calculated by dividing the dividends per share by the stock price.

The dividend yield for stock W would be 10% ($3.50 / $35), for stock X it would be 0% ($3.50 / $35), for stock Y it would be -6% ($3.50 / $58.33), and for stock Z it would be 20% for the first two years and 12% thereafter ($3.50 / $35 and $4.20 / $35).

Expected capital gains yield is calculated by subtracting the dividend yield from the required return.

Therefore, the expected capital gains yield for stock W would be 4% (14% - 10%), for stock X it would be 14% (14% - 0%), for stock Y it would be 20% (14% - (-6%)), and for stock Z it would be -6% for the first two years and 2% thereafter (14% - 20% and 14% - 12%).