1. 32.

Capital vains versus Income [LO 8.1] Consider four different shares, all of which have a required return of 13 per cent and a most recent dividend of

$3.75 per share. Shares W, X and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 per cent, 0 per cent and −5 per cent per year, respectively. Share Z is a growth share that will increase its dividend by 20 per cent for the next two years and then maintain a constant 5 per cent growth rate thereafter. What is the dividend yield for each of these four shares? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these shares.