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You are considering the purchase of a stock that just paid a dividend of $3
You are considering the purchase of a stock that just paid a dividend of $3. Its dividends are expected to grow at 4% in perpetuity.
The stock has a beta of 1.3, the risk-free rate is 3% and the return on an average stock in the market is 9%.
a) What is the required return on this stock?
b) What should you pay for a share of this stock?
c) What is the capital gains yield on this stock?
d) What is the dividend yield on this stock?
Expert Solution
a) Required return on stock = 10.80%
b) Share price of stock = $45.88
c) Capital gains yield = 4%
d) Dividend yield = 6.80%
You can calculate the capital gains yield by this formula:-
Capital gains yield = (P1 - P0) / P0
Here,
P1 = P0*(1+Growth rate)
= $45.88 * (1 + 4%)
= $47.72
Capital gains yield = ($47.72 - $45.88) / $45.88
= $1.84 / $45.88
= 4%
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