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The Birdstrom Co. just recently paid a dividend of $2.00 per share. Stock market analysts expect...

The Birdstrom Co. just recently paid a dividend of $2.00 per share. Stock market analysts expect that the growth rate for the dividend will be 40% in year 1, 30% in year 2, 20% in year 3, 15% in year 4, and 10% in year five. After the fifth year, the dividend will grow at a constant rate of 6%. If the required return for Birdstrom is 12%, calculate the current stock price and the expected dividend yield and capital gain in the first year if you buy the stock at the computed price.

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Answer #1

1. Stock Price = $70.23

2. Dividend Yield = Dividend in Year 1 / Stock Price = $2.80 / 70.23 = 3.99% or 4.00%

3. Capital gain Yield = Price at End / Current Price = ($75.86 / $70.23) - 1 = 8.01%

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