Question

A stock is selling for $50 in the market. The required rate of return is 9%. The most recent dividend paid is D₀ = $3.0 and dividends are expected to grow at a constant rate g. What’s the expected capital gain for this stock?

		2.83%
		4.19%
		4.81%
		9.0%

Answer 1

Answer : Correct option is 2.83%

Calculation of Expected Capital Gain Yield.

For this purpose we first need to calculate Growth Rate:

Current Price = [D0 * (1 + growth rate)] / (Required Return - Growth rate)

50 = [3 * (1 + growth rate)] / [0.09 - Growth Rate]

50 * [0.09 - Growth Rate] = 3 + 3 Growth rate

4.5 - 50 Growth Rate = 3 + 3 Growth rate

53 Growth Rate = 4.5 - 3

Growth Rate = 1.5 / 53

= 0.0283 or 2.83%

Capital gain Yield = [Ending Price / Current Price ] - 1

= [(50 * 1.0283) / 50] - 1

= [51.4151 / 50 ] - 1

= 1.0283 - 1

= 0.0283 or 2.83%