Answer(a): Zero growth model: Where dividend does not grow and remain same.
Formula: P0 = D0 / Re
Where P0 = stock price, D0 = Dividend, Re = Required return.
P0 = ?, D0 = $2, Re = 13%.
Putting all the above values in the formula, we get:
P0 = 2 / .13
Answer(2): Constant growth model: Where the dividend grows at a constant rate.
Formula: P0 = D1 / (Re - g)
Where D1 = D0 (1+g), g = 6%
Putting the value in the formula, we get:
P0 = 2 (1+.06) / (.13-.06)
P0 = 2.12 / .07
P0 = $30.28
Answer(3): Dividend yield = Annual dividend / Current stock price
Annual dividend = $2.12, Current stock price = $30.28
Dividend yield: 2.12 / 30.28 = 7%
Capital gain yield = (Stock price after 1st period - Initial stock price) / Initial stock price
Capital gain yield = (30.28 - 15.38) / 15.38
Capital gain yield = 96.88%
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