Question

Respond to the discussion question below by midnight Wednesday. Your initial posts must reflect
a minimum of 300 words, Reply to at least two peer posts by midnight Sunday with a minimum of
250 words.

DQ #1: If you bought a share of common stock, you would probably expect to receive dividends
plus an eventual capital gain. Would the distribution between the dividend yield and the
capital gains yield be influenced by the firm’s decision to pay more dividends rather than to
retain and re-invest more of its earnings? Explain.

Answer 1

If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. The distribution between the dividend yield and the capital gains yield should be influenced by the firm’s decision to pay more dividends rather than to retain and reinvest more of its earnings. Because if the company decides to increase payout ratio, the dividends yield component will rise, but the expected long-term capital gains yield will decline. But in log run the (i.e you want to retain the stock and sell after some period it will yeild a higher amount of capital gain as it will reinvest the amount and eventualy the stock price would raise.So ultimately the capital gain amount will also increase.