Question

The stock of ABC company is valued at $15.75 a share. The company increases its dividend by 6 percent annually and expects its next dividend to be $0.30 per share.  What is the required rate of return on this stock?  What is the dividend yield? What is the capital gain yield?

Answer 1

a.	Required rate of return			=	(D1/P0)+g		Where,
				=	(0.30/15.75)+0.06		D1	Expected dividend		$       0.30
				=	7.90%		P0	Current Price		$    15.75
							g	Growth rate		6%
b.	Dividend yield			=	Annual dividend/Current Price
				=	$       0.30	/	$    15.75
				=	1.90%
c.	Capital gain yield			=	Required rate of return - Dividend yield
				=	7.90%	-	1.90%
				=	6.00%
	Note:
	Required rate of return is the sum of dividend yield and capital gain yield.