One year ago, Hangzhou Limited made an announcement that they would not pay out any dividends for the subsequent four years and that the next dividend would be paid out in five years. The stock price at the time of the announcement was $88. Analysts expect the next dividend that will be paid out to grow at 8% for three consecutive years, then at 5% for two years and then at 4% per year forever.
a) Hangzhou stock has a beta of 1.3, the risk free rate is 4% and the market risk premium is 8%. Assume the Capital Asset Pricing Model holds. What is the required rate of return for a stock of Hangzhou Limited?
b) Calculate the next dividend that will be paid out. Use the required rate of return calculated in part a.
c) Sofu bought a stock of Hangzhou Limited one year ago. Suppose she sells it two years from now. What would be her capital gains yield over this entire three-year period?