Just today, Fawlty Foods, Inc.'s common stock paid a $1.40 annual dividend per share and had a closing price of $21. Assume that the market's required return, or capitaliza¬tion rate, for this investment is 12 percent and that dividends are expected to grow at a constant rate forever.
a. Calculate the implied growth rate in dividends.
b. What is the expected dividend
yield7
c. What is the expected capital gains yield7.
a. P0 = D1/(ke – g) = [D0(1 + g)]/(ke – g)
$21 = [$1.40(1 + g)]/(0.12 – g)
$21(0.12 – g) = $1.40(1 + g)
$2.52 – $21(g) = $1.40 + $1.40(g)
$1.12 = $22.40(g)
g = $1.12/$22.40 = 0.05 or 5 percent
b. Expected dividend yield = D1/P0 = D0(1 + g)/P0
= $1.40(1 + 0.05)/$21 = $1.47/$21 = 0.07
c. Expected capital gains yield = g = 0.05.
Just today, Fawlty Foods, Inc.'s common stock paid a $1.40 annual dividend per share and had a closing price of $21
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