
To determine: The dividend yield for each four stocks.
Introduction:
Dividend is a sum of money paid to the shareholders of the company. It is distributed among the investors from a portion of company’s earnings. This can be issued or paid as shares of stock or cash payment.
Dividend yield is a ratio that specifies how much a company pays as dividends every year on comparing with its share price. It is considered as the

Answer to Problem 32QP
The dividend yield of Stock W is 5%.
The dividend yield of Stock X is 15%.
The dividend yield of Stock Y is 20%.
The dividend yield of Stock Z is 8.8%.
Explanation of Solution
Given information:
Four different stocks have a required
The constant growth rate in dividends of Stock W is 10%.
The constant growth rate in dividends of Stock X is 0%.
The constant growth rate in dividends of Stock Y is -5%.
The constant growth rate in dividends of Stock Z is 20%.
Steps to determine the dividend yields and
- Firstly, determine the stock price for each stock. It is because all the stocks have a required return of 15%, which is the sum of dividend yield and capital gains yield.
- After determining the stock price of each stock, use the stock price and dividend to compute the dividend yield of the four stocks.
- Finally, determine the capital gains yield for the each stock by subtracting the dividend yield from the total return.
Formulae:
The formula to calculate the price of stock:
Where,
Po refers to the
Do refers to the current year dividend paid,
R refers to the discount rate,
g refers to the constant growth of dividends.
The formula to calculate the dividend yield:
Where,
D1 refers to the next period dividend per share,
Po refers to the present value of a share of stock.
Compute the stock price of Stock W:
Hence, the stock price of the Stock W is $82.50.
Compute the dividend yield of the Stock W:
Hence, the dividend yield of the Stock W is 0.05 or 5%.
Compute the stock price of Stock X:
Hence, the stock price of the Stock X is $25.00.
Compute the dividend yield of the Stock X:
Hence, the dividend yield of the Stock X is 0.15 or 15%.
Compute the stock price of Stock Y:
Hence, the stock price of the Stock Y is $17.81.
Compute the dividend yield of the Stock Y:
Hence, the dividend yield of the Stock Y is 0.20 or 20%.
Compute the stock price in Year 2 of Stock Z:
Hence, the stock price in Year 2 of Stock Z is $56.7.
Compute the current stock price of Stock Z:
Hence, the stock price of the Stock Z is $50.87.
Compute the dividend yield of the Stock Z:
Hence, the dividend yield of the Stock Z is 0.088 or 8.8%.
To determine: The capital gains yield of four stocks.
Introduction:
Capital gains yield is a ratio that indicates the rise in the price of common stock.

Answer to Problem 32QP
The capital gains yield of Stock W is 10%.
The capital gains yield of Stock X is 0%.
The capital gains yield of Stock Y is -5%.
The capital gains yield of Stock Z is 6.2%.
Explanation of Solution
Given information:
Four different stocks have a required rate of return of 15%. The computed dividend yield of each of the four stocks is as follows:
- The dividend yield of Stock W is 5%.
- The dividend yield of Stock X is 15%.
- The dividend yield of Stock Y is 20%.
- The dividend yield of Stock Z is 8.8%.
The formula to calculate the capital gains yield:
Compute the capital gains yield of Stock W:
Hence, the capital gains yield of stock W is 0.10 or 10%.
Compute the capital gains yield of Stock X:
Hence, the capital gains yield of stock X is 0.00 or 00%.
Compute the capital gains yield of Stock Y:
Hence, the capital gains yield of stock Y is -0.05 or -5%.
Compute the capital gains yield of Stock Z:
Hence, the capital gains yield of stock Z is 0.062 or 6.2%.
Interpretation regarding the relationship among the various returns of each stock:
The entire four stocks have a required rate of return of 15%. However, this return is distributed in a different way between the capital gains and current income. As per the analysis, a higher growth stock has an appreciable capital gains yield but a relatively smaller current income yield. Moreover, a negative growth stock provides a higher current income even when the price decreases over time.
Want to see more full solutions like this?
Chapter 8 Solutions
Fundamentals of Corporate Finance
- Which of the following is not true about private equity funds?* Private equity funds are pools of capital invested in companies which represent an opportunity for high rate of return Exit strategies for private equity funds include Initial Public Offerings (IPOs) and leveraged buyout (LBO) Venture capital is an example of private equity funds Private equity funds are usually invested for unlimited time periodsarrow_forwardWhat is finance ? explain about its parts.arrow_forwardDividend problem . Solve plzarrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education





