Question

Consider four different stocks, all of which have a required return of 18.25 percent and a most recent dividend of $3.10 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 11 percent, 0 percent, and –5.5 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20.25 percent for the next two years and then maintain a constant 13 percent growth rate, thereafter.

a.	What is the dividend yield for each of these four stocks? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	What is the expected capital gains yield for each of these four stocks? (A negative answer should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

A C D E LL G 1 B a) Stock W 2 3 4 5 D1 3.44 3.10 2.93 Price 47.46 16.99 12.33 Х Dividend yield 7.25% 18.25% 23.75% 4.95% Y LC Z 3.73 75.36 7 8 9 10 11 Working note: Calculation of price of Stock Z: Particulars Amount PV factor D1 3.73 0.8457 D2 4.48 0.7152 P2 96.48 0.7152 Price 12 Present value 3.15 3.21 69.00 75.36 13 14 15 16 17 18 19 20 21 22 23 b) Calculation of capital gain: Stock Cost of equity Dividend yield Capital gain yield W 18.25% 7.25% 11.00% Х 18.25% 18.25% 0.00% Y 18.25% 23.75% -5.50% Z 18.25% 4.95% 13.30%

EXCEL FORMULA:

A B C D E a) 1 2 Dividend yield 3 Stock W X 4 D1 =3.1*(1+11%) |=3.1*(1+0%) =3.1*(1-5.5%) =3.1*(1+20.25%) Price =C3/(18.25%-11%) =C4/(18.25%-0%) =C5/(18.25%--5.5%) =E14 =C3/D3 =C4/D4 =C5/D5 =C6/D6 5 6 Z 7 8 9 10 Working note: Calculation of price of S Particulars Amount PV factor D1 =3.1*(1+20.25%) =1/(1+18.25%)^1 D2 =C11*(1+20.25%) =1/(1+18.25%)^2 P2 =(C12*(1+13%)/(18.25%-13%) =1/(1+18.25%)^2 Price Present value =C11*011 =C12*D12 =C13*D13 =SUM(E11:E13) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Cost of equity Dividend yield b) Calculation of capital ga Stock W 0.1825 X 0.1825 Y 0.1825 Z 0.1825 =E3 =E4 Capital gain yield =C19-D19 =C20-D20 =C21-D21 =C22-D22 =E5 E6