Lucas Laboratories' last dividend was $1.50 and its expected growth rate is a constant 5 percent....

Question:

Lucas Laboratories' last dividend was $1.50 and its expected growth rate is a constant 5 percent. If the stockholders' required rate of return is 15 percent, what is the expected dividend yield and expected capital gains yield for the coming year?

A. 0%; 15%

B. 5%; 10%

C. 10%; 5%

D. 15%; 0%

E. 15%; 15%

Stock Returns:

The return or earnings on a stock can be broadly classified into two components:

  • 1)The dividend yield - is earned through the dividends paid by the corporation over the holding period. It cannot be negative as there are no negative dividends.
  • 2) Capital gains yield - is earned through the change in price of stock. The capital gains yield can be negative signifying a decrease in the price of the stock.

Answer and Explanation:

We shall first calculate the price of the stock through dividend growth model:

{eq}Price = \dfrac{D_{1}}{r-g} {/eq}

Here:

  • D1 is the next period...

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What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
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