Stock Prices and Returns Suppose you expect Walgreen Company (a drugstore chain) to pay dividends of

QUESTION

Stock Prices and Returns Suppose you expect Walgreen Company (a drugstore chain) to pay dividends of $0.44 per share and trade for $33 per share at the end of the year. If investments with equivalent risk to Walgreens stock have an expected return of 8.5%, what is the most you would pay today for Walgreens stock? What dividend yield and capital gain rate would you expect at this price?
Solution: Using the equation, P0 = (D1 + P1)/ (1 + ke) P0 = (0.44 + 33)/ (1.085) P0 = $30.82 Dividend yield = $0.44/$30.82 = 1.43% Capital gain rate =

(P1 P0)/P0 = (33 30.82)/30.82 = 7.07% Expected total return = 1.43% + 7.07% = 8.50%

ANSWER:

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