Question

The FabulousHI Company expects a constant growth in earnings and dividends of 2.5%/year into the foreseeable future. It is expected that the next dividend paid to stockholders will be $1.20/share. Currently the market of investors is demanding or requiring 7% on this investment.a) What is the current value of the stock?b) What is the capital gains yield on this stock?

Answer 1

Answer:

a. $26.67

b. 2.50%

Explanation:

a. Computation of the current value of the stock is given below:-

Price of stock ÷ Required rate of return - Growth rate

= $1.20 ÷ (0.07 - 0.025)

=  $1.20 ÷ 0.045

= $26.67

b. Computation of capital gains yield on this stock is shown below:-

= Required rate - Dividend yield

= 7% - ($1.20 ÷ $26.67)

= 7% - 0.04499

= 2.50%