Question

7-1. One year ago, James Sirlank bought Dell Computer common stock for $20 per share. Today the stock is selling for $19 per share. During the year, James received four dividend payments, each in the amount of $0.20 per share. (a) What rate of return did James earn during the year? (b) What were the (1) dividend yield and (2) the capital gains yield associated with the stock for the year? 7-9. Suppose your company is expected to grow at a constant rate of 6 percent long into the future. In addition, its dividend yield is expected to be 8 percent. If your company expects to pay a dividend equal to $1.06 per share at the end of the year, what is the value of your firm's stock? 7-11. Since it has been in business, Fools Gold Jewelry has never paid a dividend. The company will not pay a dividend at the end of this year. However, two years from today-at the end of Year 2-Fools Gold expects to pay a dividend equal to $0.50 per share, which it plans to increase by 6 percent each year thereafter for the remainder of the company's life. If investors require a 14 percent rate of return to purchase its common stock, what should be the market value of Fools Gold's stock today?

Answer 1

7-1.

Dividend yield =?

Capital Gain yield =?

Capital gain yield= (current price-original price)/original price*100

   = $90-$100/$100*100

= $-81%

Dividend yield for James common stock=$0.02/100

= $0.002%

James received four dividend payments hence,0.002*4

= $0.008

Rate of return James earned during the year = $ -0.802

7-9.

The company is expected to grow at constant rate of 6% long time in future.

In addition, dividend yield expected is 8%

Company expect to pay dividend =$1.06

Calculation for stock

D1=Do*(1+g)

=$1.06*(1+8%)

=$1.1448

Companies price per share= D(1)/(r-g)

= $1.1448/(6%-8%)

= $20.7391304347........

7-11

Rate of return required= 14%

Estimated dividend=$0.50

Company growth or increase=6%

Calculation= $0.50/(0.14-0.06)

=$6.25