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Dividend yield = $3.250 /$59.047
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A B C D E F G H
Build a Model Solution 11/26/2018
Chapter: 7 Valuation of Stocks and Corporations
Problem: 27
a. What is Hamilton’s estimated stock price today?
D0$2.50
$59.0465
= P0
a. What is Hamilton’s estimated stock price for Year 1?
P2+D2
1. Find the expected dividend yield.
2. Find the expected capital gains yield.
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%.
P1
=
(1 + rs)
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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(P2 – P1)/P1
Cap. Gain yield= $3.11 /$62.2917
Cap. Gain yield= 5.00%
Cap. Gain yield= Expected return –Dividend yield
Cap. Gain yield= 11.0% –6.00%
Cap. Gain yield= 5.00%
Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total
expected return.
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A B C D E F G H
Use the estimated price for Year 1, P1, to find the expected gain.
Cap. Gain yield=
(P1 – P0)/P0
Cap. Gain yield= $3.25 /$59.0465
Cap. Gain yield= 5.50%
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.
2. Find the expected capital gains yield.
Use the estimated price for Year 2, P2, to find the expected gain.
Alternatively, the capital gains yield can be calculated by simply subtracting the dividend yield from the total
expected return.
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?
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Dividend yield = $3.738 /$62.292