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Snyder Co. is experiencing a period of rapid growth. Earnings and dividends are expected to grow...

Question:

Snyder Co. is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 15% during the next 2 years, at 13% in the third year, and at a constant rate of 6% thereafter. Snyder's last dividend was $1.15, and the required rate of return (equity cost of capital) on the stock is 12%. Calculate the dividend yield and capital gains yield for Years 1, 2, and 3.

Dividend Yield:

The dividend yield is a ratio that compares the dividend generated from the company with its existing share price. This ratio is used by investors to compare the dividend yield of several companies.

Answer and Explanation:

Step 1: Compute the dividend yields for the stock. We have,

{eq}Dividend \ Yield \ = \displaystyle \frac{Annual \ Dividend}{Current \ Stock \ Price} {/eq}

Year Current dividend Current price Dividend yield = Current dividend / Current price
0 1.15 1.15/0.12 = 9.58 12.00%
1 1.32 1.32/0.12 = 11.02 11.98%
2 1.52 1.52/0.12 = 12.65 12.02%
3 1.72 1.72/0.12 = 14.31 12.02%

Step 2: Calculation of the capital yields for the stock. We have,

Year Current price Capital gain = End price - Beginning price Capital gain yield = Capital gain / Beginning price * 100
0 9.58 0 0
1 11.02 11.02 - 9.58 = 1.44 15.03%
2 12.65 12.65 - 11.02 = 1.63 14.79%
3 14.31 14.31 - 12.65 = 1.66 13.12%

Learn more about this topic:

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What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
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