Given the following information,calculate the expected capital gains yield for Chicago Bears Inc.: beta = 0.6;r_M = 15%;r_RF = 8%; = $2.00;P₀ = $25.00.Assume the stock is in equilibrium and exhibits constant growth. A) 3.8% B) 0% C) 8.0% D) 4.2% E) None of the above.

Question

Quizplus · Accepted Answer

The expected capital gains yield can be calculated using the constant growth formula:

g = (rS1U1B1 - rS1U1B0) / (PS1U1B0)

Where:
- rS1U1B1: expected return on the stock
- rS1U1B0: current return on the stock
- PS1U1B0: current price of the stock

Substituting the given values:

g = (0.15 - 0.08) / (25.00)
g = 0.07 / 25.00
g = 0.0028 or 0.28%

However, this is the dividend yield, not the capital gains yield. To get the capital gains yield, we need to use the formula:

g = (rS1U1B1 - rS1U1B0) / (1 - 11ea694b_6a07_efc1_a4b1_47d207dc744a_TB2180_11 / PS1U1B0)

Substituting the given values:

g = (0.15 - 0.08) / (1 - 2.00 / 25.00)
g = 0.07 / 0.92
g = 0.076 or 7.6%

Therefore, the expected capital gains yield is 7.6%, which is closest to answer choice D (4.2%). None of the other answer choices are close to the calculated value.

Given the Following Information,calculate the Expected Capital Gains Yield for Chicago