Dividend and Capital Gain Yields 1.Paul Dargis has analyzed five stocks and esti
ID: 2765739 • Letter: D
Question
Dividend and Capital Gain Yields 1.Paul Dargis has analyzed five stocks and estimated the dividends they will pay next year as well as their prices at the end of the year. His projections are shown below. Current Projected Projected Stock Price Dividend Stock Price A $37.50 $1.45 $43.00 B $24.50 $0.90 $26.50 C $57.80 $2.10 $63.50 D $74.35 None $81.00 E $64.80 $3.15 $63.00 Compute the dividend yield, capital gains yield, and total one-year return implied by Paul’s estimates for each stock. SOLUTION PRACTICED IN CLASS LAST WEEK: Stock A Dividend Yield: $1.45/$37.50 = 3.87% Capital Gains Yield: ($43.00 - $37.50)/$37.50 = 14.67% Total Yield: 3.87% + 14.67% = 18.54% Stock B Dividend Yield: $.90/$24.50 = 3.67% Capital Gains Yield: ($26.50 - $24.50)/$24.50 = 8.16% Total Yield: 3.67% + 8.16% = 11.83% Stock C Dividend Yield: $2.10/$57.80 = 3.63% Capital Gains Yield: ($63.50 - $57.80)/$57.80 = 9.86% Total Yield: 3.63% + 9.86% = 13.49% Stock D Dividend Yield: $0/$74.35 = 0.0% Capital Gains Yield: ($81.00 - $74.35)/$74.35 = 8.94% Total Yield: 8.94% Stock E Dividend Yield: $3.15/$64.80 = 4.86% Capital Gains Yield: ($63.00 – 64.80)/$64.80 = (2.78%) Total Yield: 4.86% + (2.78%) = 2.08%
Explanation / Answer
Ans;
Stock DIVIDEND YIELD Capital Gains yield Total one year return
A -- $1.45 ---- $5.50 (43-37.50) ---- $6.95
B -- $0.90 ---- $2.00 (26.50-24.50) ---- $2.90
C -- $2.10 ---- $5.70 (63.50-57.80) --- $7.80
D -- 0 ---- $6.65 (81-74.35) --- $6.65
E -- $3.15 ----- -$1.80 (63-64.80) --- $1.35
SOLUTION:
Stock A
Dividend Yield:$1.45/$37.50 = 3.87%
Capital Gains Yield:
($43.00 - $37.50)/$37.50 = 14.67%
Total Yield:
3.87% + 14.67% = 18.54%
Stock B
Dividend Yield:$.90/$24.50 = 3.67%
Capital Gains Yield:
($26.50 - $24.50)/$24.50 = 8.16%
Total Yield:
3.67% + 8.16% = 11.83%
Stock C
Dividend Yield:$2.10/$57.80 = 3.63%
Capital Gains Yield:
($63.50 - $57.80)/$57.80 = 9.86%
188
Total Yield:
Stock D
Dividend Yield:$0/$74.35 = 0.0%
Capital Gains Yield:
($81.00 - $74.35)/$74.35 = 8.94%
Total Yield:
8.94%
Stock E
Dividend Yield:$3.15/$64.80 = 4.86%
Capital Gains Yield:
($63.00 – 64.80)/$64.80 = (2.78%)
Total Yield:
4.86% + (2.78%) = 2.08%