Question

Hamilton Landscaping's dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to Year 2, and drop to a constant 5% for Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50 and its stock has a required return of 11%.

Required:
a. What is Hamilton's estimated stock price today?
b. What is Hamilton's estimated stock price for Year 1?
c. If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming year?

Answer 1

a. D1 = D0*1.30. D1 = $2.50*1.30 = $3.25

D2 = D1*1.15 = $3.25*1.15 = $3.7375

D3 = D2*1.05 = $3.7375*1.05 = $3.92438

P2 = D3/(rs – gL)

P2 = $3.92438/(0.11-0.05)

P2 = $65.4063

P0 = $3.25/1.11 + $3.7375/1.11^2 + $65.4063/1.11^2

P0 = $59.0465

So, Hamilton's estimated stock price today is $59.05.

b. P1 = (P2 + D2) / (1+rs)

P1 = (65.406+3.7375)/(1+0.11)

P1 = $62.29

So, Hamilton's estimated stock price for Year 1 is $62.29 .

c. Dividend Yield = D1/P0

Dividend Yield = $3.25/59.047

Dividend Yield = 0.0550409

Dividend Yield = 5.50%

Capital Yield Gain = (P1 – P0) / P0

Capital Yield Gain = (62.29-59.0465)/59.0465

Capital Yield Gain = 3.2435/59.0465

Capital Yield Gain = 0.0549313

Capital Yield Gain = 5.49%