Solutions Guide: - JustAnswer
Solutions Guide:
If you bought a share of common stock, you would probably expect to receive dividends plus an eventual capital gain. Would the distribution between the dividend yield and the capital gains yield be influenced by the firm's decision to pay more dividends rather than to retain and reinvest orbits earnings? Explain.
Yes. If a company decides to increase its payout ratio, then the dividend yield
component will rise, but the expected long-term capital gains yield will decline.
This is because the dividend yield D1/P0 plus the capital gain g represent the
expected return Ks, hence an increase in dividends would result in a decrease in g.
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