Question

Q8) You observe a stock price of S 18.75. You expect a dividend growth rate of 5%, and the most recent dividend was $1.50. What is the required return? What is the dividend yield and capital gains yield? Do 1 +g) 0

Answer 1

A	B	C	D	E	F	G	H	I	J
2
3
4		As per dividend growth model, Price of share is the present value of all future dividends discounted at cost of equity.
5		Current Price of Share (P)	=Div0*(1+g)/(r-g)
6		Where Div1 is the dividend paid next year, r is cost of equity and g is perpetual growth rate of dividend.
7
8		Cost of equity can be calculated as below:
9		Cost of equity, r(E) = (Div0*(1+g)/P)+g
10
11		Given the following data:
12		Dividend (Div0)	$1.50
13		Price (P)	$18.75
14		Growth rate (g)	5.0%
15
16		From Dividend growth model,
17		Cost of equity, r(E) = (Div0*(1+g)/P)+g
18		Cost of equity=	13.40%	=(D12*(1+D14)/D13)+D14
19
20		Hence required return is	13.40%
21
22		Dividend yield	= Dividend Paid /Current Price of share
23			8.00%	=D12/D13
24
25		Hence Dividend Yield is	8.00%
26
27		Capital gain yield at Year 0	=(Price at Year 1 - Price at Year 0)/Price at year 0
28
29		Calculation of Share Price at Year 1:
30
31		Given the following data:
32		Dividend (Div1)	$1.58	=D12*(1+D14)
33		Cost of equity (r)	13%
34		Growth rate (g)	5.0%
35
36		From Dividend growth model,
37		Share Price at year 1, P1	=Div3*(1+g)/(r-g)
38			$19.69	=D32*(1+D34)/(D33-D34)
39
40		Hence Share Price at Year 1 is	$19.69
41
42		Capital gain yield at Year 0	=(Price at Year 1 - Price at Year 0)/Price at year 0
43			5.00%	=(D40-D13)/D13
44
45		Hence the capital gain yield at Year 0 is	5.00%
46