Question

6. Assume a corporation has just paid a dividend of $ 2.96 per share. The dividend...

6. Assume a corporation has just paid a dividend of $ 2.96 per share. The dividend is expected to grow at a rate of 3.4% per year forever, and the discount rate is 8.2%.

What is the Capital Gains yield of this stock?

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Answer #1

Capital gain yield is 3.40%

Capital Gain Yield = Total yield - Dividend Yield
= 8.20% - 4.80%
= 3.40%
Working:
As per dividend discount method,
Current Share Price = D0*(1+g)/(Ke-g) Where,
= 2.96*(1+0.034)/(0.0820-0.0340) D0 = $       2.96
= $    63.76 g = 3.40%
Ke = 8.20%
Current Yield = D0*(1+g)/P0 Where,
= 2.96*(1+0.034)/63.76 D0 = $       2.96
= 4.80% P0 = $    63.76
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