Suppose a stock had an initial price of $20 per share, paid a dividend of $0.40 per share during...

Question:

Suppose a stock had an initial price of $20 per share, paid a dividend of $0.40 per share during the year, and had an ending share price of $26.

What was the dividend yield and the capital gains yield? (Do not round intermediate calculations. Enter answers as a percent rounded to 2 decimal places.)

Yields on stock

There are two types of yield calculated on stock. They are:-

i. Dividend Yield and

ii. Capital gains yield

Both dividend yield and capital gains yield increases the wealth of the investors.

Answer and Explanation:

Given that Initial Price, {eq}P_{0} {/eq} = $20, Dividend Per share, {eq}DPS {/eq} = $0.40 and Ending share price, {eq}P_{1} {/eq} = $26

The dividend yield, {eq}DY {/eq} is calculated using the equation as follows:-

{eq}\displaystyle DY = \frac{DPS}{P_{0}} {/eq}

{eq}\displaystyle DY = \frac{0.40}{20} {/eq}

{eq}\displaystyle DY {/eq} = 0.02 or 2%

Now, the capital gains yield, {eq}CGY {/eq} is calculated as follows:-

{eq}\displaystyle CGY = \frac{P_{1} - P_{0}}{P_{0}} {/eq}

{eq}\displaystyle CGY = \frac{26 - 20}{20} {/eq}

{eq}\displaystyle CGY {/eq} = 0.3 or 30%

Therefore, the dividend yield is 2% and capital gains yield is 30%.


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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