There a four shares on offer with the following characteristics: Share name Divi
ID: 2658917 • Letter: T
Question
There a four shares on offer with the following characteristics:
Share name
Dividend growth
Dividend growth rate
Most recent dividend
Required return
InternetServiceCo
Constant
10.5%
$3.50
15%
Ordinary Ltd
Constant
1%
$3.00
15%
NotWithIt Ltd
Constant
-4%
$4.00
15%
Amazing Corp
Not-constant
(growth stock)
21% - next 2 yrs
Then constant 12.5% thereafter
$5.00
15%
Determine the dividend yield and the expected capital gains yield for each of these shares and discuss the relationship among the returns that you find for each of these shares.
Share name
Dividend growth
Dividend growth rate
Most recent dividend
Required return
InternetServiceCo
Constant
10.5%
$3.50
15%
Ordinary Ltd
Constant
1%
$3.00
15%
NotWithIt Ltd
Constant
-4%
$4.00
15%
Amazing Corp
Not-constant
(growth stock)
21% - next 2 yrs
Then constant 12.5% thereafter
$5.00
15%
Explanation / Answer
Required return - growth rate = dividend yield
InternetServiceCo
dividend yield = 15%-10.5%= 4.5%
expected capital gains yield = 10.5%
Ordinary Ltd
dividend yield = 15%-1%= 14%
expected capital gains yield = 1%
NotWithIt Ltd
dividend yield = 15%-(-4%)= 19%
expected capital gains yield = -4%
Amazing Corp
P= 5*(1+21%)/1.15+ 5*(1+21%)^2/1.15^2 + (5*(1+21%)^2*(1+12.5%)/(15%-12.5%))/1.15^2=259.89
dividend yield =5/259.89 = 1.92%
expected capital gains yield =21%
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