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Answer the following questions regarding dividend discount models: What are the two components of most stocks’...

  1. Answer the following questions regarding dividend discount models:

    1. What are the two components of most stocks’ expected total return?

    2. What is the general formula to calculate the capital gains yield and the dividend yield of a stock

      (one that holds when firm’s dividends are growing at a constant rate and when they are not)?

    3. Write out and explain the dividend discount model formula for a constant growth stock. What is

      the capital gains yield and dividend yields for a constant growth stock?

    4. How does one calculate the capital gains yield and the dividend yield of a non-constant growth

      stock during the time period over which dividends grow at a non-constant rate?

    5. What is the relationship between stocks’ total expected return and capital gains yield for a new

      growth stock that is paying no dividends?

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Answer #1

1. Two components of most stock expected total Return would be income and capital appreciation.

Capital appreciation is considered with appreciation in the overall value of the assets and which does not lead to any distribution. Like if you buy asset today and sell it after 10 years, the change in the value of the assets on the higher side would be capital appreciation.

Income is also a type of distributions to the shareholders of the asset which will lead to income generation like dividend aur capital gains.

Dividend is a type of income which is used as fixed percentage of profit and it is paid to the shareholders of the company.

Using these two types of Returns, investors generate an Alpha.

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