14. What is the expected price of a stock which pays a $1 dividend next year,...
14. What is the expected price of a stock which pays a $1 dividend next year, has a required return of 5% and a dividend growth of 1%?
What is the expected total return of the stock?
What is the dividend yield of the stock?
What is the capital gains return of the stock?
Homework Answers
- From the above problem,
dividend(d1) = $1
required rate of return or cost of equity capital (r) = 5% or 0.05
dividend growth (g) = 1% or 0.01
To calculate the expected price of the stock we will use dividend growth model:
Price (P) = d1/(r-g) = $1 / (.05-.01) = $25.
- Total return = (Return from increase in price of the stock + dividend yield)
Total return = (0.05 * $25 + $1) = $2.25 (in one year.)
- Dividend Yield = (Dividend per share / Current market price)*100
dividend yield = ($1 / $25)*100 = 4%
- Capital gain return = $2.25/$25 = 0.09 = 9%
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