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2. Assume that you own a stock with a market price of $30. This stock pays...


2. Assume that you own a stock with a market price of $30. This stock pays a constant dividends of share. If the price of the stock suddenly rises to $40, you would expect the:
A. Dividend yield to remain constant.
B. Dividend yield to increase.
C. Capital gains yield to decrease.
D. Capital gains yield and the dividend yield to both decline.
E. Capital gains yield to increase and the divided yield to decrease

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Answer #1

Dividend Yield = Expected Dividend/Current Price

Capital Gains Yield = (Expected Price - Current Price)/Current Price

Hence, when dividend remains constant and price increases

Capital gains yield will increase and the dividend yield will decrease

Hence, the answer is

E. Capital gains yield to increase and the divided yield to decrease

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