Question

A)

Assume a corporation has just paid a dividend of $ 1.03 per share. The dividend is expected to grow at a rate of 4.4% per year forever, and the discount rate is 8.1%.

What is the Capital Gains yield of this stock?

B)

You're analyzing the stock of a certain company. The most recent dividend paid was $3 dollars per share. The company's discount rate is 10%, and the firm is expected to grow at 4% per year forever. What is the dividend yield of this stock?

Answer 1

A. Capital gain yield will be equal to the growth rate of dividend i.e. 4.4%.

B. The dividend yield is computed as shown below:

= Dividend in next year / current price

current price is computed as follows:

= Dividend in next year / (discount rate - growth rate)

= ($ 3 x 1.04) / (0.10 - 0.04)

= $ 52

So, the dividend yield will be as follows:

= ($ 3 x 1.04) / $ 52

= 6%

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