ABCs last annual cash dividend was 150 per share Its current

ABC’s last annual cash dividend was $1.50 per share. Its current equilibrium share market price is $15.75. The company is expected to grow at an annual rate of 5%. If your required rate of return is 15%, calculate for the coming year

(a) the expected dividend yield and

(b) the expected capital gains yield.

Solution

a). Expected Dividend Yield = Forward Dividend / Current Stock Price

= ($1.50 x 1.05) / $15.75

= $1.575 / $15.75 = 0.10, or 10%

b). P1 = D2/(R - g)

= D1(1 + g)/(R - g)

= $1.575(1.05)/(0.15 - 0.05) = $1.65375/0.10 = $16.5375

Expected Capital Gains Yield = (p1 - p0) / p0

= ($16.5375 - $15.75)/$15.75 = $0.7875/$15.75 = 0.05, or 5%