Question

Llano’s stock is currently selling for $50.00. The expected dividend one year from now is $1.50, and the dividend growth rate is constant at 7%. Assuming the constant dividend growth model is appropriate, what is investor's required rate of return? what is dividend yield? what is the capital gains yield?

a) Can't decide based on the information
b) 10%,7%,7%
c) 10%, 3%, 7%
d) 7%, 7%,7%

Answer 1

correct option is c) 10%, 3%, 7%

Step-by-step explanation:

given data

currently selling = $50.00

expected dividend = $1.50

dividend growth rate = 7%

solution

we get here Required return that is express as

Required return = (expected dividend ÷ Current price) + Growth rate ...........1

put her value and we get

Required return = \frac{1.5}{50} + 0.07

Required return = 10%

and

now we get Dividend yield that is express as

Dividend yield = Dividend ÷ Current price ...........2

put here value we get

Dividend yield = \frac{1.5}{50}

Dividend yield = 3%

and

Capital gains yield = Growth rate

Capital gains yield = 7%

so correct option is c) 10%, 3%, 7%