Question

The Fly-By-Night Corp. paid a dividend of $2.85 last year and the dividend is expected to grow at 5% per year for the foreseeable future. The company’s stock is currently selling for $38 per share. What are the expected dividend yield, capital gains yield, and total expected return for Fly-By-Night.

Answer 1

Answer: Dividend yield is 7.875%,

Capital gain yield is 5%

Total yield is 12.875%

Step-by-step explanation:

Dividend last year= 2.85

Growth rate = 5% or 0.05

∴ Dividend next year
`D_(1) = D_(0)*(1+g)`

=2.85×(1+0.05)

=2.9925

Stock price = $38

Required Return =
`(D_(1))/(P_(0) )` + Growth rate

= (2.9925/38 ) + 0.05

= 0.12875

`P_(1)= P_(0)*(1+Growth)`

= 38×(1+0.05)

= 39.9

Dividend yield =
`(D_(1))/(P_(0) )`

= 2.9925÷38

= 0.07875 or 7.875%

Capital gain yield =
`((P_(1) -P_(0) ) )/(P_(0) )`

=
`((39.9 - 38))/(38)`

= 0.05 or 5%

Total Expected Return = Dividend yield + Capital gain yield

= 0.07875 + 0.05

= 0.12875 or 12.875%

∴ Dividend yield is 7.875%,

Capital gain yield is 5%

Total yield is 12.875%