Question

2.5/5 pts Partial Question 8 Shell is experiencing rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% the following year, and at a constant rate of 6% during Year 4 and thereafter. Its last dividend was $1.15, and its required rate of return is 12%. f) Calculate the dividend and capital gains yields for Years 1, 2, and 3. Dividend Yield Year 1 = 5.24 Capital Gains Yield Year 1 = 6.76 Dividend Yield Year 2 - 5.65 Capital Gains Yield Year 2 = 6.35 Dividend Yield Year 3 = 5.63 Capital Gains Yield Year 3 - 6.37

Answer 1

Last Dividend, D0 = $1.15

Growth rate for first 2 years is 15%, for next year is 13% and a constant growth rate (g) of 6% thereafter

D1 = $1.1500 * 1.15 = $1.3225
D2 = $1.3225 * 1.15 = $1.5209
D3 = $1.5209 * 1.13 = $1.7186
D4 = $1.7186 * 1.06 = $1.8217

Required Return, rs = 12%

P3 = D4 / (rs - g)
P3 = $1.8217 / (0.12 - 0.06)
P3 = $30.3617

P2 = D3/(1+rs) + P3/(1+rs)
P2 = $1.7186/1.12 + $30.3617/1.12
P2 = $28.6431

P1 = D2/(1+rs) + P2/(1+rs)
P1 = $1.5209/1.12 + $28.6431/1.12
P1 = $26.9321

P0 = D1/(1+rs) + P1/(1+rs)
P0 = $1.3225/1.12 + $26.9321/1.12
P0 = $25.2273

Year 1:

Dividend Yield = D1 / P0
Dividend Yield = $1.3225 / $25.2273
Dividend Yield = 0.0524 or 5.24%

Capital Gain Yield = Required Return - Dividend Yield
Capital Gain Yield = 12.00% - 5.24%
Capital Gain Yield = 6.76%

Year 2:

Dividend Yield = D2 / P1
Dividend Yield = $1.5209 / $26.9321
Dividend Yield = 0.0565 or 5.65%

Capital Gain Yield = Required Return - Dividend Yield
Capital Gain Yield = 12.00% - 5.65%
Capital Gain Yield = 6.35%

Year 3:

Dividend Yield = D3 / P2
Dividend Yield = $1.7186 / $28.6431
Dividend Yield = 0.0600 or 6.00%

Capital Gain Yield = Required Return - Dividend Yield
Capital Gain Yield = 12.00% - 6.00%
Capital Gain Yield = 6.00%