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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.

Respuesta :

Answer: Dividend yield is 7.875%,

Capital gain yield is 5%

Total yield is 12.875%

Explanation:

Dividend last year=   2.85  

Growth rate = 5% or  0.05

∴ Dividend next year [tex]D_{1} = D_{0}\times(1+g)[/tex]     

=2.85×(1+0.05)

=2.9925  

Stock price = $38  

Required Return = [tex]\frac{D_{1}}{P_{0} }[/tex] + Growth rate      

= (2.9925/38 ) + 0.05      

= 0.12875      

[tex]P_{1}= P_{0}\times(1+Growth)[/tex]    

= 38×(1+0.05)

= 39.9  

Dividend yield = [tex]\frac{D_{1}}{P_{0} }[/tex]    

= 2.9925÷38

=  0.07875   or 7.875%

Capital gain yield = [tex]\frac{(P_{1} -P_{0} ) }{P_{0} }[/tex]      

= [tex]\frac{(39.9 - 38)}{38}[/tex]

= 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%

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