Question

The stock of Townships Ski Resorts, Inc. just paid a dividend of $0.78. What is the expected capital gains yield if the stock is selling for $28.25 today and the required rate of return is 15 percent?

A. 13.62%

B. 12.30%

C. 11.91%

D. 10.73%

Answer 1

Solution:

Dividend just paid: $ 0.78 , Current Price : $28.25 Required rate of return:15%

Let Expected capital Gain is : g

Current Price = Current Dividend * (1+g) / (Required rate of return - g)

$ 28.25 = 0.78 * (1+g) / (0.15 - g)

28.25 * (0.15 - g) = 0.78 + 0.78g

4.2375 - 28.25g = 0.78 + 0.78g

4.2375 - 0.78 = 0.78g + 28.25g

3.4575 = 29.03g

g = 3.4575 / 29.03

g = 3.4575 / 29.03

g = 0.1191 or 11.91%

Hence, Option C. 11.91%, is the correct answer.

(Please provide your valuable feedback and hit like. Thank You)