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Consider four different stocks, all of which have a required return of 12 percent and a most recent dividend of $3.00 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 percent, and –4 percent per year, respectively. Stock Z is a growth stock that will increase its dividend by 20 percent for the next two years and then maintain a constant 10 percent growth rate thereafter. What is the dividend yield and capital gains yield for each of these four stocks? (Leave no cells blank - be certain to enter "0" wherever required. A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 1 decimal place, e.g., 32.1.)

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jepessoa

Answer:

we must first determine the current price of the stocks:

W = $3.30 / (12% - 10%) = $165

X = $3 / 12% = $25

Y = $2.88 / (12% + 4%) = $18

Z = $3.60/1.12 + $4.32/1.12² + $237.60/1.12² (terminal value at year 2) = $3.21 + $3.44 + $189.41 = $196.06

current year's dividend yield:

  • W = $3 / $165 = 1.8%
  • X = $3 / $25 = 12%
  • Y = $3 / $18 = 16.7%
  • Z = $3 / $196.06 = 1.5%

now we must determine the price of the stocks in one year:

W = $3.63 / (12% - 10%) = $181.50

X = $3 / 12% = $25

Y = $2.7648 / (12% + 4%) = $17.28

Z = $4.32/1.12 + $237.60/1.12 = $3.86 + $212.14 = $216

capital gains yield:

  • W = ($181.50 - $165) / $165 = 10%
  • X = ($25 - $25) / $25 = 0
  • Y = ($17.28 - $18) / $18 = -4%
  • Z = ($216 - $196.06) / $196.06 = 10.2%