Question

1. (a) What are the two components of most stocks’ expected total return?

(b) How does one calculate the capital gains yield and the dividend yield of a stock?

(c) If D1 = RM3.00, P0 = RM50, and the expected P at t=1 is equal to RM52, what are the stock’s expected dividend yield, capital gains yield, and total return for the coming year?

2. (a) Are stock prices affected more by long-term or short-term performance? Explain.

(b) A stock is expected to pay a dividend of RM2 at the end of the year. The required rate of return is rs = 12%. What would the stock’s price be if the growth rate were 4%? What would the stock’s price be if the growth rate were 0%?

3. If D0 = RM4.00, rs = 9%, and g = 5% for a constant growth stock, what are the stock’s expected dividend yield and capital gains yield for the coming year?

4. (a) Explain what is meant by the terms “horizon (terminal) date” and “horizon (terminal) value”.

(b)Suppose D0 = RM5.00 and rs = 10%. The expected growth rate from Year 0 to Year 1 (g0 to 1) = 20%, the expected growth rate from Year 1 to Year 2 (g1 to 2) = 10%, and the constant rate beyond Year 2 is gn = 5%. What are the expected dividends for Year 1 and Year 2? What is the expected horizon value price at Year 2? What is the expected P0?

5. (a) A bond that pays interest forever and has no maturity date is a perpetual bond, also called a perpetuity or a consol. In what respect is a perpetual bond similar to (i) a non-growth common stock and (ii) a share of preferred stock?

(b) A preferred stock has an annual dividend of RM5. The required return is 8%. What is the Vps.

Answer 1

Answer 1

a. The two components of most stocks’ expected total return are Dividend and capital gain. The return any investor would get from investing in a stock is classified into two categories - Regular income from dividend and capital gain from sale of securities.

(b) Capital gains yield = Price at the time of sale - purchase price / purchase price * 100

and the dividend yield = Dividend recived from the stock / Purchase price of stock * 100

(c) If D1 = RM3.00, P0 = RM50, and the expected P at t=1 is equal to RM52,

stock’s expected dividend yield = 3 / 50*100 = 6% ,

capital gains yield = (52-50)/50*100 = 4%

and total return for the coming year =( 3 + (52 - 50))/50*100 = 10%