Capital Gains versus Income Consider four different equities, all of which have a required return of 15
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Capital Gains versus Income Consider four different equities, all of which have a required return of 15 per cent and a most recent dividend of £4.00 per share. Equities 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. Equity Z is a growth stock that will increase its dividend by 20 per cent for the next two years and then maintain a constant 12 per cent growth rate thereafter. What is the dividend yield for each of these four equities? What is the expected capital gains yield? Discuss the relationship among the various returns that you find for each of these equities.
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