Concept explainers
To determine: The dividend yields for each stock and also computes the capital gain yield also express the relationship between dividend yield and capital gain yield.
Dividend Yield:
It is a relation of dividend and its share price, it interpret that the investment in share gives the appropriate amount of dividend to the investor.
Capital Gain Yield:
It is a method used to calculate the capital gain in the share price of a stock. The capital gain is computed by dividing the rise in share by its original price of the stock.
Answer to Problem 29QP
Solution: The dividend yield of W, X, Y and Z is 7%, 14%, 19% and 5.03%. The capital gain yield of W, X, Y and Z is 7%, 0%, -5% and 8.97%.
Explanation of Solution
Formula to calculate dividend yield is,
Formula to calculate the capital gain yield is,
For stock W
Given,
Dividend is $3.50.
Growth rate is 7%.
Share price is $53.50.
Calculate dividend yield.
Substitute $3.50 for dividend, 7% for growth rate and $53.50 for share price in equation (1).
Calculate capital gain yield.
Substitute 14% for rate of return and 7% for dividend yield in equation (2).
For stock X
Given,
Dividend is $3.50.
Growth rate is 0%.
Share price is $25.
Calculate dividend yield.
Substitute $3.50 for dividend, 0% for growth rate and $25 for share price in equation (1).
Calculate capital gain yield.
Substitute 14% for rate of return and 14% for dividend yield in equation (2).
For stock Y
Given,
Dividend is $3.50.
Growth rate is 5%.
Share price is $17.50.
Calculate dividend yield.
Substitute $3.50 for dividend, 5% for growth rate and $17.50 for share price in equation (1).
Calculate capital gain yield.
Substitute 14% for rate of return and 19% for dividend yield in equation (2).
For stock Z
Given,
Dividend is $3.50.
Growth rate is 30%.
Share price is $90.47.
Calculate dividend yield.
Substitute $3.50 for dividend, 30% for growth rate and $90.47 for share price in equation (1).
Calculate capital gain yield.
Substitute 14% for rate of return and 5.03% for dividend yield in equation (2).
Working notes:
Calculate the stock price of stock W,
Calculate the stock price of stock X,
Calculate the stock price of stock Y.
Calculate the stock price of stock Z for next 2 years,
Calculate current price of Z,
The relation between capital gain yield and dividend yield is that the stock which has high growth rate having high capital gain yield and dividend yield will be low.
Thus, the dividend yield of W, X, Y and Z is 7%, 14%, 19% and 5.03%. The capital gain yield of W, X, Y and Z is 7%, 0%, -5% and 8.97%.
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Chapter 9 Solutions
EBK CORPORATE FINANCE
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