59533341-FM11-Ch-07-Instructors-Manual-1

92 633642304 6106 into the cash flow register input

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Unformatted text preview: 304 + 61.06) into the cash flow register, input I = 10, PV = ? PV = $54.11. Part 2. Expected dividend yield: D1/P0 = $1.92/$54.11 = 3.55%. Ö Capital gains yield: First, find P1 which equals the sum of the present values of D2 Ö and P2 , discounted for one year. $2.304  $61.06 Ö Ö = $57.60. P1 = D2(PVIF10%, 1) + P2 (PVIF10%, 1) = (1.10)1 Calculator solution: Input 0, 63.364(2.304 + 61.06) into the cash flow register, input I = 10, PV = ? PV = $57.60. Second, find the capital gains yield: Answers and Solutions: 7 - 13 Ö 1 0 = $57.60  $54.11 = 6.45%. $54.11 0 Dividend yield = 3.55% Capital gains yield = 6.45 10.00% = rs. b. Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, rs = 10%, the distribution between dividend yield and capital gains yield will differ: The dividend yield will start off lower and the capital gains yield will start off higher for the 5-year supernormal growth condition, relative to the 2-year supernormal growth state. The dividend yield will increase and the capital gains yield will decline over the 5-year period until dividend yield = 4% and capital gains yield = 6%. c. Throughout the supernormal growth period, the total yield will be 10 percent, but the dividend yield is relatively low during the early years of the supernormal growth period and the capital gains yield is relatively high. As we near the end of the supernormal growth period, the capital gains yield declines and the dividend yield rises. After the supernormal growth period has ended, the capital gains yield will equal gn = 6%. The total yield must equal rs = 10%, so the dividend yield must equal 10% - 6% = 4%. d. Some investors need cash dividends (retired people) while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on capital gains can be delayed until the gain is actually realized. 7-19 a. rs = rRF + (rM - rRF)b = 11% + (14% - 11%)1.5 = 15...
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This note was uploaded on 09/14/2012 for the course MBA 341 taught by Professor Jamnadas during the Spring '12 term at LIM.

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