Question

If D1 = $1.50.8 (which is constant) = 254, and Po = $56, then what is the stocks expected capital gains yveld for the coming year 03.08% O 1.95% 02.98% 2.50% 2.83%

Answer 1

Answer: Option-(d): 2.50% Workings: Capital gain yield = (Bond price after one year - Bond price today) / Bond price today Where, Bond price after one year = D2 x (1 + Growth rate) / (Required return rate - Growth rate) D2 = D1 x (1 + Growth rate) D1 Growth rate $1.50 2.5% $1.5375 Required return rate = D1 / Current Stock Price + Growth Rate D1 $1.50 Current Stock Price $56 Growth Rate 2.5% Required return rate 5.1786% {($1.50 / $56) + 2.5% = 2.6786% + 2.5% = 5.1786%} D2 ($1.5 x 102.5%] Stock price after one year = D2 / (Required return rate - Perpetual growth rate) D2 Perpetual growth rate Required return rate Stock price after one year $1.5375 [As calculated above] 2.5% [Given that growth rate will remain constant from year-4 onwards] 5.1786% [As calculated above] $57.4 ($1.5375/(5.1786% - 2.5%) = $1.5375 / 2.6786% = $1.5375 / 0.026786 = $57.4] Capital gain yield = ($57.4 - $56)/$56 = $1.4 / $56 = 0.025 = 2.50%.