Question

D Co. has just paid a dividend of 2.50 Baht per share on its stock. The dividends are expected to grow at a constant rate of 5 percent forever. The stock currently sells for 20 Baht per share. What are the dividend yield and the expected capital gains yield?

Answer #1

As per Constant Gordon Growth model

Stock Price = Dividend for the Next Period / (Required return - Constant growth Rate)

Shuffling the formula we get

Required Return = Dividend for the Next Period / Stock Price + Constant growth Rate

= 2.5 (1 + 5%) / 20 + 5%

= 18.125%

Dividend Yield = Dividend for the Next Period / Stock Price * 100

= 13.125%

The constant growth rate of Dividend is the expected capital gains yield. In long run the capital appreciation merges with constant growth rate

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