1. A stock just paid a dividend of $2.00. Analysts expect the dividend to grow a

Question

1. A stock just paid a dividend of $2.00. Analysts expect the dividend to grow at rate of 8%. What is the dividend yield and capital gains yield if the price of the stock is currently $21.60?

2. Assume the historic returns of a common stock for the last four years are as follows: 6%, 5%, 2% and -3%? What is the average mean of return over the last four years?

3. Assume the historic returns of a common stock for the last four years are as follows: 6%, 5%, 2% and -3%? What is the standard deviation of the returns of this stock? If the returns are normally distributed, what is the range of returns expected using a 95% level of confidence? Explain the result to the grandfather who is planning to purchase this stock for $50 and would like to sell it at the end of the year.

Explanation / Answer

Dividend yield = dividend / share price

Dividend yield = 2 / 21.60

Dividend yield = 0.0926 or 9.26%

Next year dividend = 2 × 1.08 = 2.16

Next year share price = 21.6 × 1.08 = 23.328

Capital gains yield = (23.328 + 2.16 - 21.6) / 21.6

Capital gains yield = 0.18 or 18%

2

Average mean of return = ( 0.06 + 0.05 + 0.02 - 0.03) / 4

Average mean of return = 2.5%

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