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3 years ago

What is the expected annual capital gain yield for Orange Corp stock, based on the Constant Dividend Growth Model

Business

1 answer:

lyudmila [28]3 years ago

6 0

Complete Question:

What is the expected annual capital gain yield for Orange Corp stock, based on the Constant Dividend Growth Model? The company plans to pay an annual dividend of of $4.12 per share in one year. The expected annual growth rate of the dividend is 12.9%, and the required rate of return for the stock is 16.63%. Answer as a percentage, 2 decimal places (e.g., 12.34% as 12.34).

Answer:

12.9%

Explanation:

As we know that:

Capital Gain Yield = (P1 - P0) / P0

Step 1: Find P0

Po = D1 / (Ke - g)

Here

D1 is $4.12 per share

Ke is 16.63%

g is 12.9%

By putting values, we have:

Po = $4.12 / (16.63% - 12.9%)

= $110.46

Step 2: Find P1

P1 = D2 / (Ke - g)

Here

D2 = D1 * (1 + 12.9%) = $4.12 per share * (1 + 12.9%) = $4.65

Ke is 16.63%

g is 12.9%

By putting values, we have:

Po = $4.65 / (16.63% - 12.9%)

= $124.70

<u>Step3: Find Annual Capital Gain Yield</u>

Capital Gain Yield = (P1 - P0) / P0

Now by putting values, we have:

Capital Gain Yield = ($124.7 - $110.46) / $110.46

= 12.9%

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