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20 March, 07:13

Lucas Laboratories' last dividend was $1.50. Its current equilibrium stock price is $15.75, and its expected growth rate is a constant 5%. If the stockholders' required rate of return is 15%, what is the expected dividend yield and expected capital gains yield for the coming year

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  1. 20 March, 08:33
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    Expected dividend yield = 10.0%

    Expected capital gains yield = 5.0%

    Explanation:

    D0 = $1.50 (Given)

    E (D1) = D0 * (1 + g) = $1.50 * (1.05) = $1.575

    E (P0) = $15.75 (Given)

    E (P1) = $15.75 * (1.05) 1 = $16.5375

    Expected dividend yield = E (D1) / E (P0)

    = $1.575 / $15.75 = 0.100 = 10.0%

    Expected capital gains yield = (E (P1) - E (P0)) / E (P0)

    ($16.5375 - $15.75) / $15.75 = 0.050 = 5.0%
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