Question

The next dividend payment by Hoffman, Inc., will be $2.50 per share. The dividends are anticipated to maintain a growth rate of 5.75 percent forever. Assume the stock currently sells for $48.60 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? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Dividend yield b. Capital gains yield < Prev 10 of 15 Next >

Answer 1

1-a). Dividend Yield = D1/P0 = $2.50 / $48.60 = 0.0514, or 5.14%

1-b). Capital gains yield = g = 5.75%

2-a). PV of Cash Inflows = Annual Cash Flow * [{1 - (1 + r)^-n} / r]

= $2,750 * [{1 - (1 + 0.10)^-9} / 0.10]

= $2,750 * [0.5759 / 0.10]

= $2,750 * 5.759 = $15,837.32

NPV = PV of Cash Inflows - PV of Cash Outflows

= $15,837.32 - $9,000 = $6,837.32

2-b). PV of Cash Inflows = Annual Cash Flow * [{1 - (1 + r)^-n} / r]

= $2,750 * [{1 - (1 + 0.29)^-9} / 0.29]

= $2,750 * [0.8989 / 0.29]

= $2,750 * 3.0997 = $8,524.18

NPV = PV of Cash Inflows - PV of Cash Outflows

= $8,524.18 - $9,000 = -$475.82

2-c). To find the IRR, we need to put the following values in the financial calculator:

CF0 = -9000; C01 = 2750; F01 = 9; Press IRR, then CPT, which gives us 27

So, IRR = 27%