FINE 2000 Lecture Notes - Lecture 11: Dow Jones Industrial Average, S&P 500 Index, Dividend Yield

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bluescorpion455

19 Apr 2016

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Introduction to risk, return and the opportunity cost of capital. When investors buy a stock or bond, they get a return in 2 ways. (1) the dividend or interest payment (2) the capital gain or capital loss. The % return on investment = capital gain + dividend payment / initial share price. The % return on investment can be calculated by the sum of dividend yield and % capital gain. Dividend yield is the dividend expressed as a % of the initial stock price. % capital gain = capital gain / initial stock price. Rates of return can be calculated for any time period i. e. a day, month or even years. To measure the rates for different time periods it is necessary to convert them to ear. To convert the nominal rate of return to the real rate of return we use the following equation:

Related Questions

Conroy Consulting Corporation (CCC) has been growing at a rate of 14% per year in recent years. This same non-constant growth rate is expected to last for another 2 years (g0,1 = g1,2 = 14%). If D0= $1.70, rs= 9% and gL = 6%, then what is CCC's stock worth today? Round your answer to the nearest cent. Do not round your intermediate computations. $ What is its expected dividend yield at this time? Round the answer to two decimal places. Do not round your intermediate computations. % What is its capital gains yields at this time? Round the answer to two decimal places. Do not round your intermediate computations. % Now assume that CCC's period of supernormal growth is to last another 5 years rather than 2 years (g0,1 = g1,2 = g2,3 = g3,4 = g4,5 = 14%). How would this affect its price, dividend yield, and capital gains yield? I.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. II.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. III.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the supernormal growth period. IV.Due to the longer period of supernormal growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. V.Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the supernormal growth period. What will CCC's dividend yield and capital gains yield be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth, and the calculations are very easy.) Round the answers to two decimal places. Do not round your intermediate computations. Dividend yield % Capital gains yield % Of what interest to investors is the relationship over time between dividend yield and capital gains yield? I.It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate. II.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year. III.It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold. IV.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized. V.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold.

pearyellowjacket214

1. Suppose you bought a 16 percent coupon bond one year ago for $1,130.

â¢The bond sells for $1,190 today.

â¢What is your realized percentage return if you sell the bond today?

2. Suppose a stock had an initial price of $77 per share, paid a dividend of $1.05 per share during the year, and had an ending share price of $83.

âWhat is the dividend yield?

âWhat is the capital gains yield?

3. Average annual return is a good measure of expected return when?

A.Returns are volatile over time

B.The distribution of possible returns does not change over time

C.Negative estimation errors cancel out positive estimation errors

D.Never - this is not a good measure of expected return

aquamarinehornet444

"Two firms with the same dividend per share and growth rate must also have the same required rate of return." True or false

"In the Gordon model, the dividend is expected to grow forever at a constant rate, but the expected dividend yield would not be constant if the stock is priced in equilibrium." True or false?

"In the world of the Gordon Model, if the stock is priced in equilibrium, the capital gain yield is equal to the dividend growth rate." True or false?

Suppose that a company has a major change in its investment policy and as a consequence, the beta of its stocks is lower than before but the growth rate is also lower than before. Assuming that other factors remain constant, these two changes would offset each other and thus the stock price would not be affected." True or false?

FINE 2000 Lecture Notes - Lecture 11: Dow Jones Industrial Average, S&P 500 Index, Dividend Yield

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