The next dividend payment by Savitz, Inc., will be $2.34 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $37 per share.

a. What is the required return?

b. What is the dividend yield?

c. What is the expected capital gains yield?

a. 10.8%

b. 6.32%

c. 4.5%

Explanation:

a. Required return = (Expected dividend payment/current stock price) + dividend growth rate

Required return = (2.34/37) + 0.045

Required return = 0.108 ⇒ 10.8%

b. Dividend yield = dividend per share / price per share

Dividend yield = 2.34/37 = 0.0632 ⇒ 6.32%

c. The capital gains yield refers to the rise in the price of the stock. In this case, the statement indicates that the dividends are anticipated to maintain a growth rate of 4.5 percent forever and according to the definition of capital gains yield that would be the answer for the expected capital gains yield.