EXAMPLE

You buy a stock for $$20\mathrm{.}80,$ and you expect the next annual dividend to be $$1\mathrm{.}04.$ Furthermore,

you expect the dividend to grow at a constant rate of $4\%.$ What is the expected rate of return and

dividend yield on the stock?

Div Yield $=$

Capital Gains Yield $=$

EXTENSION

What is the expected price of this stock in $5$ years?

$N=,5$

Using the growth rate we find that:

$P_5=$