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A stock just paid an annual dividend of $6.4. The dividend is expected to grow by...

A stock just paid an annual dividend of $6.4. The dividend is expected to grow by 2% per year for the next 4 years. In 4 years, the P/E ratio is expected to be 11 and the payout ratio to be 60%.

The required rate of return is 8%.

What is the expected capital gains yield?

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Answer #1

Capital gains yield is the percentage price appreciation on an investment. It is calculated as the increase in the price of an investment, divided by its original acquisition cost.

Formula = (P1-P0)/P0

Where,

  • P0 = Initial Stock Price
  • P1 = Stock Price after First time period.

Expected EPS = (DPS + Growth rate) Dividend payout ratio

= 6.4+2% = 6.528/60*100= 10.88

Expected MPS (P1) = Expected EPS*P/E ratio = 10.88*11 = 119.68

Total return formula = [(P1-P0)+D0]/P0 = (119.68-P0+6.4)/Po= 8%

P0 = 116.74

Therefore, capital gain yield = (119.68-116.74)/116.74*100 = 2.52%

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