To determine: The dividend yield for each four stocks.
Introduction:
Dividend is a sum of money paid to the shareholders of the company. It is distributed among the investors from a portion of company’s earnings. This can be issued or paid as shares of stock or cash payment.
Dividend yield is a ratio that specifies how much a company pays as dividends every year on comparing with its share price. It is considered as the
Answer to Problem 32QP
The dividend yield of Stock W is 5%.
The dividend yield of Stock X is 15%.
The dividend yield of Stock Y is 20%.
The dividend yield of Stock Z is 8.8%.
Explanation of Solution
Given information:
Four different stocks have a required
The constant growth rate in dividends of Stock W is 10%.
The constant growth rate in dividends of Stock X is 0%.
The constant growth rate in dividends of Stock Y is -5%.
The constant growth rate in dividends of Stock Z is 20%.
Steps to determine the dividend yields and
- Firstly, determine the stock price for each stock. It is because all the stocks have a required return of 15%, which is the sum of dividend yield and capital gains yield.
- After determining the stock price of each stock, use the stock price and dividend to compute the dividend yield of the four stocks.
- Finally, determine the capital gains yield for the each stock by subtracting the dividend yield from the total return.
Formulae:
The formula to calculate the price of stock:
Where,
Po refers to the present value of a share of stock,
Do refers to the current year dividend paid,
R refers to the discount rate,
g refers to the constant growth of dividends.
The formula to calculate the dividend yield:
Where,
D1 refers to the next period dividend per share,
Po refers to the present value of a share of stock.
Compute the stock price of Stock W:
Hence, the stock price of the Stock W is $82.50.
Compute the dividend yield of the Stock W:
Hence, the dividend yield of the Stock W is 0.05 or 5%.
Compute the stock price of Stock X:
Hence, the stock price of the Stock X is $25.00.
Compute the dividend yield of the Stock X:
Hence, the dividend yield of the Stock X is 0.15 or 15%.
Compute the stock price of Stock Y:
Hence, the stock price of the Stock Y is $17.81.
Compute the dividend yield of the Stock Y:
Hence, the dividend yield of the Stock Y is 0.20 or 20%.
Compute the stock price in Year 2 of Stock Z:
Hence, the stock price in Year 2 of Stock Z is $56.7.
Compute the current stock price of Stock Z:
Hence, the stock price of the Stock Z is $50.87.
Compute the dividend yield of the Stock Z:
Hence, the dividend yield of the Stock Z is 0.088 or 8.8%.
To determine: The capital gains yield of four stocks.
Introduction:
Capital gains yield is a ratio that indicates the rise in the price of common stock.
Answer to Problem 32QP
The capital gains yield of Stock W is 10%.
The capital gains yield of Stock X is 0%.
The capital gains yield of Stock Y is -5%.
The capital gains yield of Stock Z is 6.2%.
Explanation of Solution
Given information:
Four different stocks have a required rate of return of 15%. The computed dividend yield of each of the four stocks is as follows:
- The dividend yield of Stock W is 5%.
- The dividend yield of Stock X is 15%.
- The dividend yield of Stock Y is 20%.
- The dividend yield of Stock Z is 8.8%.
The formula to calculate the capital gains yield:
Compute the capital gains yield of Stock W:
Hence, the capital gains yield of stock W is 0.10 or 10%.
Compute the capital gains yield of Stock X:
Hence, the capital gains yield of stock X is 0.00 or 00%.
Compute the capital gains yield of Stock Y:
Hence, the capital gains yield of stock Y is -0.05 or -5%.
Compute the capital gains yield of Stock Z:
Hence, the capital gains yield of stock Z is 0.062 or 6.2%.
Interpretation regarding the relationship among the various returns of each stock:
The entire four stocks have a required rate of return of 15%. However, this return is distributed in a different way between the capital gains and current income. As per the analysis, a higher growth stock has an appreciable capital gains yield but a relatively smaller current income yield. Moreover, a negative growth stock provides a higher current income even when the price decreases over time.
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Chapter 8 Solutions
Fundamentals of Corporate Finance
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