Question

The current price of Janco stock is $22.54. Dividends are expected to grow at 6.10% indefinitely...

The current price of Janco stock is $22.54. Dividends are expected to grow at 6.10% indefinitely and the most recent dividend paid yesterday was $3.80.

a) What is the required rate of return on Jancos stock?

b) What is the Dividend Yield on Jancos Stock?

c) What is the Capital Gains Yield on Jancos Stock?

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Answer #1

a) Price = $22.54

D0 = $3.80

g = 6.10%

D1 = D0 * (1 + g)

D1 = 3.80 * (1 + 0.0610)

D1 = $4.0318

Price = D1/(r - g)

r = D1/Price + g

r = 4.0318/22.54 + 0.061

r = 0.1788731145 + 0.061

r = 0.2398731145

r = 23.98731145%

The required rate of return on the stock = 23.98731145%

b) Dividend yield = D1/Price

Dividend yield = 4.0318/22.54

Dividend yield = 0.1788731145

Dividend yield = 17.88731145%

c) Capital gains yield on the stock = The required rate of reuturn - Dividend yield

Capital gains yield on the stock = 0.2398731145 - 0.1788731145

Capital gains yield on the stock = 0.061

Capital gains yield on the stock = 6.10%

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