Earnings and Dividend Growth Rate

[KSJT]

Hello, can anyone assist with this problem
ZZZ Inc stock is trading at 17.50
Company stock will be year-end dividend of 0.84
Expected capital gains yield is 3.60%
% Forecast of growth rate of earnings and dividends is ????
Thank You

 

[MrSmart]

That doesn’t make sense.
Are you assuming a constant dividend yield? Is the expected growth in perpetuity? Is P/E constant? Is price fairly valued?

 

[KSJT]

This is cut and pasted from the workbook, I think more info is needed but the problem only gives the below info.
Image attached
http://postimg.org/image/bwl2qhp6l/

 

[busprof]

In a constant growth stock, the stock price will grow at the same rate as the dividends. This growth rate is also called the capital gains yield. So, if the capital gains yield is 3.6%, so is the expected growth rate in dividends or earnings (assuming, of course, that the firm maintains a cosntant dividend payout ratio).
While not asked for, the required rate of return on equity (or cost of equity) in this case will be the sum of the dividend yield plus the growth rate, or 0.84/17.50 + 0.036, or 0.084

 

[KSJT]

Thank you busprof. Also thank you for the growth rate = capital gains yield. One thing many of us see in the text book is they use a certain terminology in the text book “long term growth rate” then in the workbook, they will throw slight variations aka “long run growth rate”, which causes confusion for those of us who are in learning-mode.
Thank you

 

[busprof]

No worries. Glad I could help.