Question

Dixie South currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ______ than the stock of Dixie South.

Answer 1

Available Options are:

A. Market price.

B. Dividend yield.

C. Capital gains yield.

D. Total return.

E. Real return.

Answer:

C. Capital gains yield.

Explanation:

This can be explained using the Dividend valuation model formula, which is as under:

Po = Dividend * (1+g) / (R-g)

The reason is that the dividend paid out of Northern Culture has higher growth rate than the Dixie South which means that if the growth is higher the increase in the share value is higher. The growth in share value will increase the share price significantly because increase in growth increases the nominator by (1+g) and decreases the denominator by g. This means that the capital gains (Stock sale price - Stock purchase price) will increase significantly and hence the capital gains yield will increase.

As the company Northern has higher dividend growth rate, it will have higher Capital gains yield than the the stock of Dixie.