correct ans a6111 b 2 c 9 d 4606 e 2 f 9 A stock plans to ma

correct ans:

a)61.11, b) -2%, c) 9%, d) 46.06, e) -2%, f) -9%

A stock plans to make a dividend payment at the end of the year of $5.50. After that, dividends will decline at a rate of 2% per year indefinitely. The required return on the stock is 7%. What is the value of the stock today? $59.89 What is this year\'s capital gains yield? 7% what is this year\'s dividend yield? 9% What is the value of the stock in 14 years? $82.90 What is the capital gains yield in 100 years? 7% What is the dividend yield in 25 years? 7%

Solution

a)Price= D1/(Rs-g)

      = 5.5 / (.07-(-.02)]

     = 5.5 / [.07+.02]

        = 5.5 /.09

       = $ 61.11 per share

2)Dividend yield = D1/price

                = 5.5 /61.11

                = .09 or 9%

capital gain yield =required return - dividend yield

              = 7-9

           = -2%

3)dividend yield = 9%

4)value of stock in 14 years = D15 /(Rs-g)

          = 4.1450/[-.07-(-.02)]

            = 4.1450 /[.07+.02]

            = 4.1450 / .09

            = $ 46.06

**D15 =D1(1+g]^ 14

    =5.5 [1+(-.02)]^14

      =5.5 [1-.02]^14

      =5.5 [.98]^14

       = 4.1450

e)since growth rate is constant indefinetly capital gain yield and dividend yield will remain same

CG yield = -2%

f)Dividend yield = 9%