If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock’s expected capital gains yield for the coming year?

Dividend Discount Models (DDM) can be used to calculate the expected capital gain yield for the upcoming year. DDM, a stock-valuation model, takes the price and dividend of a company into account, then calculates its expected return. To calculate the expected capital gains yield using this model, we need to know three inputs: D1 (the upcoming year’s dividend), g (which is constant) and P0 (the current stock price).

We are told that D1 is $2.00 and g is 6%. P0 equals $40. We can use these values to calculate capital gain yields:
Estimated capital gains yield = [D1/(P0 – g)] The x100

[$2/$(40-6%)] The x100

[$2/37.4 ] The x100

5.36%

Accordingly, the capital gain yield on this stock is estimated at 5.36% based upon the information we were given (D1=$2.00, g=6% and P0=$40).