Equity Valuation – Annual Capital Gain

Practice Question

Intro to Finance
Equity Valuation
Dividend
Short Answer

What is the annual capital gain of a company that is selling for $180, just paid a $5 dividend, and has a required rate of return of 9%?

Answer +
Final Answer: 6% (or 0.060)
Explanation +

Step 1: Identify Given Information

  • Stock Price (\( P_0 \)) = 180
  • Dividend just paid (\( D_0 \)) = 5
  • Required return (\( K \)) = 0.09

Step 2: Use Rearranged DDM Formula for Growth (Capital Gain)

\[ g = K - \frac{D_0}{P_0} \]

Step 3: Plug in the Values

\[ g = 0.09 - \frac{5}{180} = 0.09 - 0.02778 \approx 0.06222 \]

Conclusion: The annual capital gain (growth rate) is approximately 6%.