Given the following information, calculate the expected capital gains yield for Limpopo Pumas Inc.: beta = 0.6; rM = 15%; rRF = 8%; = R2.00; P0 = R25.00.Assume the share is in equilibrium and exhibits constant growth.

Question

Quizplus · Accepted Answer

First, we can calculate the required rate of return using the capital asset pricing model (CAPM):

rA = rRF + βA (rM – rRF)
rA = 8% + 0.6(15% – 8%)
rA = 12.2%

Next, we can use the constant growth model to calculate the expected dividend yield:

D1 = D0(1 + g)
g = (D1 / D0) – 1
g = R2.00 / R25.00
g = 8%

Finally, we can calculate the expected capital gains yield:

CG = g – (rA – g)
CG = 8% – (12.2% – 8%)
CG = 4.2%

Given the Following Information, Calculate the Expected Capital Gains Yield