Question 4.

Investment is comprised of two stocks, all of which have a required return of 15% and a most recent dividend of $2.50 per share. Stocks are expected to maintain constant growth rate in dividends for the foreseeable future of 8 percent and -5 percent per year, respectively.

a) What is the dividend yield for each of these stocks? What is the expected capital gain yield? (15 marks)

b) Discuss the relationship among the various returns that you find for each of these stocks. (5 marks)