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%
