Q5) Consider four stocks, all of which have a required rate of return of 19% and
ID: 2644034 • Letter: Q
Question
Q5) Consider four stocks, all of which have a required rate of return of 19% and a most recent dividend of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of-10%. 0%, and -5% per year, respectively. Stock Z is a growth stock that will increase its dividend by 20% for the next two years and maintain a constant 12% growth rate thereafter. What is the dividend yield for each of these four stocks? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these stocks.Explanation / Answer
Price of the Stock(W) : DIV1/(r-g)=4.50*1.10/(0.19-0.10)=55
Dividend Yield=(4.5/55)*100=8.18%
Price of the Stock(X) : DIV1/(r-g)=4.50*1.0/(0.19-0)=23.68
Dividend Yield=(4.50/23.68)*100=19.00%
Price of the Stock(Y) : DIV1/(r-g)=4.50*0.95/(0.19+0.05)=17.81
Dividend Yield=(4.5/17.81)*100=25.26%
Price of the Stock(Z) : =4.50*1.20/1.19+(4.50*1.20^2)/(1.19^2)+4.50*1.20^3/(0.19-0.12)=120.19
Dividend Yield=(4.5/120.19)*100=3.74%
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