In chapter 22 we see that the
Expected return = initial income yield + expected capital growth
So, suppose the share price of company A is x pence.
The last dividend just paid was y pence and the dividends are expected to grow by 5% each year - so next year the dividend paid out will be y*(1+5%) and the year after it will be y*(1+5%)^2 and so on.
My (probably silly) questions are:
1. Is it right that the dividend yield will be 5% in this case, i.e. dividend yield = growth rate of dividends?
2. Out of interest (I don't think it would be required for CA1), how is future dividend yield determined? Would it involve stochastically projecting profits of the company and then working out the dividends that could be given and so arriving at dividend yields?
3. Formula on page 6 says, price = dividend/ dividend yield.
So, am I correct in saying that the share price in my example is
x = y*(1+5%)/5% ? {I believe this is covered in another chapter}
4. What is meant by initial yield on an asset? How would I calculate the initial yield in this example?
Cheers
Last edited by a moderator: Dec 14, 2008