Expected Return of Common Stock Wooster Inc. has common stock with a market price of $120 per share. We expect the next dividend to be $9 and the constant growth rate to be 4% Calculate the following Expected return (Total yield) Dividend yield Capital gain or loss yield

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
icon
Concept explainers
Topic Video
Question
**Expected Return of Common Stock**

Wooster Inc. has common stock with a market price of $120 per share. We expect the next dividend to be $9 and the constant growth rate to be 4%. Calculate the following:

a. Expected return (Total yield)
b. Dividend yield
c. Capital gain or loss yield
Transcribed Image Text:**Expected Return of Common Stock** Wooster Inc. has common stock with a market price of $120 per share. We expect the next dividend to be $9 and the constant growth rate to be 4%. Calculate the following: a. Expected return (Total yield) b. Dividend yield c. Capital gain or loss yield
Expert Solution
Step 1: Introduction to concept of dividend discount model

The concept of dividend discount model will be used and applied here. The dividend discount model states that value of a stock today is the present value of all its future dividends. This is essentially based on the concept of time value of money. The present value and dividend amount is given and hence we need to find the rate that will be used to discount the future dividends so as to get a price of $120.

trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 3 images

Blurred answer
Knowledge Booster
Stock Valuation
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education