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The next dividend payment by Wyatt, Inc., will be $2.30 per share. The dividends are anticipated...

Question:

The next dividend payment by Wyatt, Inc., will be $2.30 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. Assume the stock currently sells for $39.85 per share. What is the dividend yield? What is the expected capital gains yield?

Dividend Yield & Capital Gains

The value of a stock depends on the expected future cash flows and growth and the stock's return consists of dividend yield and capital gains. The capital gain is the percentage increase in stock price while the dividend yield is the expected dividend as a fraction of the stock price.

Answer and Explanation:

Given the following information,

{eq}D_1 = $2.30 {/eq}

{eq}g = 0.045 {/eq}

{eq}P_0 = $39.85 {/eq}

The return on a stock consists of dividend yield and capital gains.

{eq}R_E = Dividend Yield + Capital Gains {/eq}

{eq}R_E = D_1/P_0 + g {/eq}

{eq}R_E = $2.30/$39.85 + 0.045 {/eq}

{eq}R_E = 0.0577 + 0.045 {/eq}

{eq}R_E = 0.1027 {/eq}

{eq}R_E = 10.27\% {/eq}

The dividend yield is 5.77% and capital gains are 4.50%.


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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