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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 firms decision to pay more dividends rather than to retain and reinvest more of its earnings? Explain.
1. Capital appreciation is the appreciation in commoditie’s price (common stock).For a security it is change in price of security divided by purchase price of security. Capital gains yield is calculated as [P(1) – P(0)] / P(0) If we buy a security for $15and after sometime the price rises to $20 the the capital appreciation is = (20-15)/15 =33.33% 2. if the company holds more of its earnings and pays a dividend of $2 per share then its dividend yield would be $2/$20=0.1 if the company holds more of its earnings and pays a dividend of $1per…

e then its dividend yield would be $1/$20=0.05 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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