Question

Consider the following for a firm. Its stock price (P₀) is at $50, its payout ratio (POR) is 0.4, its EPS₁ is $2.00, and investor required return is 10%.. What is the percentage of capital gains?

Answer 1

Payout ratio (POR) = 0.4

Investor required return (IRR) = 10%

Then, the percentage of capital gains (CG) is:

$CG = (1-POR)\times IRR$

$CG = (1 - 0.4)\times 0.10=0.6 \approx6 \%$