Bradley Broadcasting expects to pay dividends of $1.10, $1.21, and $1.331 in one, two, and three years, respectively. After that, dividends are expected to grow at a constant rate of 4% forever. Stocks of similar risk yield 10%.

What is expected capital gains yield on Bradley Broadcasting stock during year 8?

Question

What is expected capital gains yield on Bradley Broadcasting stock during year 8?

Quizplus · Accepted Answer

The capital gains yield of a stock is equal to the growth rate of its dividends when dividends grow at a constant rate. Since Bradley Broadcasting's dividends are expected to grow at a constant rate of 4% forever after the third year, the capital gains yield during year 8, or any year after the dividends begin growing at a constant rate, would also be 4%.

Bradley Broadcasting Expects to Pay Dividends of $1