The next dividend payment by Grenier, Inc., will be $2.00 per share. The dividends are...

Question:

The next dividend payment by Grenier, Inc., will be $2.00 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. The stock currently sells for $40 per share.

a. What is the dividend yield?

b. What is the expected capital gains yield?

Dividend:

Dividend refers to the amount of money that each shareholder get as profit against investment they have done in company in the form of equity and preference shares. Dividend yield is the percentage of dividend paid by company to its share price.

Answer and Explanation:

a)

{eq}\begin{align*} \rm\text{Dividend yield}&= \dfrac{\rm\text{Expected dividend}}{\rm\text{Value of stock}} \times 100\\&= \dfrac{\$ 2\;\rm\text{per share}}{\$ 40} \times 100\\&= 0.05 \times 100\\ &= 5\% \end{align*} {/eq}

b)

{eq}\begin{align*}\rm\text{Value of stock}&= \dfrac{\rm\text{Expected dividend}}{\rm\text{Required rate of return} - \rm\text{Growth rate}}\\\$ 40 &= \dfrac{\$ 2\;\rm\text{per share}}{\rm\text{Required rate of return} - 6\% }\\\rm\text{Required rate of return} - 6\% &= \dfrac{\$ 2\;\rm\text{per share}}{\$ 40}\\ \rm\text{Required rate of return}&= 11\% \end{align*} {/eq}

{eq}\begin{align*}\rm\text{Capital gain yield}&= \rm\text{Required rate of return} - \rm\text{dividend yield}\\&= 11\% - 5\% \\&= 6\% \end{align*} {/eq}


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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