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Suppose a stock had an initial price of $56 per share, paid a dividend of $1.60 per share during...

Question:

Suppose a stock had an initial price of $56 per share, paid a dividend of $1.60 per share during the year, and had an ending share price of $66. What was the dividend yield and the capital gains yield?

Dividend Yield and Capital Gains

The return of stock consists of the dividend yield and capital gains. The dividend yield implies the dividend per share scaled by the initial price of the stock while the capital gain is the percentage change in the price of the stock.

Answer and Explanation:

Given the following information about the stock,

{eq}P_0 = $56 {/eq}

{eq}D_1 = $1.60/share {/eq}

{eq}P_1 = $66 {/eq}

A stock's return is composed of the dividend yield and capital gains.

{eq}R_s = D_1/P_0 + P_1 - P_0 / P_0 {/eq}

{eq}R_s = $1.60/$56 + ($66-$56)/$56 {/eq}

{eq}R_s = 0.0286 + 0.1786 {/eq}

{eq}R_s = 0.2072 {/eq}

The dividend yield is 2.86% while the capital gain is 17.86%.


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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