Question

A stock just paid $2 and the stock is currently selling at $50 per share. If the beta for this stock is 1.5, risk free return 3% and market total return is 9%, what is its expected dividend yield and capital gain yield for this coming year? Assume that this stock is in a market equilibrium.

Answer 1

Given about stock,

last divident paid D0= $2

current price P0= $50

Beta = 1.5

Risk free rate Rf= 3%

Market total return Rm= 9%

So, expected return on stock is calculated using CAPM model

R= Rf+beta*(Rm-Rf)= 3+1.5*(9-3) = 12%

Now , Dividend growtn rate is calculated using constant growth model,

P0= D0(1+g)/(R-g)

50=2*(1+g)/(0.12-g)

=> 25*0.12 - 25g = 1+g

=> g = 7.69%

So, capital gain yield= growth rate => 7.69%

and Dividend yield = R-g => 12-7.69 => 4.31%