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A B C D E F G H
Solution 12/7/2012
Chapter: 7
Problem: 22
a. What is Hamilton's estimated stock price today?
6.0%
= rs – gL
$59.0465
= P0
a. What is Hamilton's estimated stock price for Year 1?
1.11
P1= $62.29
1. Find the expected dividend yield.
2. Find the expected capital gains yield.
Use the estimated price for Year 1, P1, to find the expected gain.
Cap. Gain yield=
(P1 – P0) / P0
Hamilton Landscaping's dividend growth rate is expected to be 30% in the next year, drop to 15% from Year 1 to
Year 2, and drop to a constant 5% for Year 2 and all subsequent years. Hamilton has just paid a dividend of $2.50
and its stock has a required return of 11%.
=
expected return.
b. If you bought the stock at Year 0, what your expected dividend yield and capital gains for the upcoming year?
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A B C D E F G H
Cap. Gain yield= Expected return –Dividend yield
Cap. Gain yield= 11.0% –5.50%
Cap. Gain yield= 5.50%
1. Find the expected dividend yield.
Use the estimated price for Year 2, P2, to find the expected gain.
Cap. Gain yield=
(P2 – P1) / P1
Cap. Gain yield= $3.11 / $62.2917
Cap. Gain yield= 5.00%
c. What your expected dividend yield and capital gains for the second year (from Year 1 to Year 2)? Why aren't
these the same as for the first year?
