Question

Conner Corporation common stock is selling for $30.35 per share. The last dividend was $2.42 per share. The expected long run dividend growth rate is a constant 9 percent per year. The stock's expected capital gains yield is?

Answer 1

Given,

P0 = Current stock price = $ 30.35

Last Dividend = D0 = $ 2.42

Constant dividend growth rate = g = 9 % p.a. = 0.09 per year

Therefore,  

P0 = D0(1+g) / (r-g)

==> (r-g) = D0(1+g) / P0

==> r = ( D0(1+g) / P0) + g = ($ 2.42(1+0.09)/$ 30.35 ) + 0.09 = 0.1769

==> r = 0.1769 = 17.69 %

Therefore,

The required rate of return on the stock = r= 17.69 %

And

Required Rate of Return = dividend yield + Growth rate

==> Growth rate = Required rate of return - Dividend yield = 17.69 % - 9 % = 8.69%

Therefore, Capital gains yield = 8.69 %