The next dividend payment by ECY, Inc., will be $1.60 per share. The dividends a

Question

The next dividend payment by ECY, Inc., will be $1.60 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. The stock currently sells for $30 per share.

What is the dividend yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Dividend yield %=

What is the expected capital gains yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Capital gains yield %=

Explanation / Answer

1. Dividend Yield% = annual dividend payment / current market price * 100 = $1.60/$30 * 100 = 5.33%

2. Capital Gain Yield = (P1- P0)/P0, where as P0 = $30, in order to find P1, we nee to calculate required rate of return,

under DDM, P0 = D1/(r-g) => 30 = 1.6/(r-0.06) => r=11.33%

Then, P1 = D2/(r-g) = 1.6(1+0.06)/(01133-.06) = $31.82

Hence Capital Gain Yield% = (31.82-30)/30 * 100 = 6.07%

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