Question

You observe the latest dividend paid of $4 per share. The growth rate is projected to be a constant 5 % per year. Your required rate of return is 8%. a. What price are you willing to pay for that stock today? b. What is expected stock price in 1 year? c. Find dividend yield d. Find capital gains

Answer 1

a.

Current price = Expected dividend/(required return - growth rate)

Current price = (4*(1+5%))/(8%-5%)

Current price = 4.2/3%

Current price = 140

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b.

Expected price = Current price * (1+growth rate)

Expected price = 140*(1+5%)

Expected price = 147

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c.

Dividend yield = expected dividend/ Current price

Dividend yield = 4.2/140

Dividend yield = 3%

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d.

Capital gain = required return - dividend yield

Capital gain = 8% - 3%

Capital gain = 5%