The next dividend payment by Halestorm, Inc., will be $1.18 per share. The dividends are anticipated to maintain a growth rate of 1.27 percent forever. If the stock currently sells for $2.93 per share, what is the expected capital gains yield?

The expected capital gains yield can be calculated using the Gordon Growth Model, which is used to determine the intrinsic value of a stock, excluding current income. The model is based on the future series of dividends that grow at a constant rate, given the following formula:

P = D / (k - g)

Where: P = price of the stock today D = Dividend expected next year k = required rate of return (or discount rate) g = growth rate of dividends

In this case, we are given: P = $2.93 (current stock price) D =$1.18 (next dividend payment) g = 1.27% (growth rate of dividends)

We are asked to find the capital gains yield, which is the rate at which the value of the investment increases (or decreases) for a specific set of returns. Capital gains yield is calculated by taking the difference in market price and subtracting the original purchase price, then dividing by the purchase price.

However, in the context of the Gordon Growth Model, the capital gains yield is also the difference between the required rate of return and the dividend growth rate (k - g).

We can rearrange the Gordon Growth Model formula to solve for k (required rate of return):

k = D/P + g

Substituting the given values:

k = $1.18 /$2.93 + 1.27% = 40.27% + 1.27% = 41.54%

Therefore, the expected capital gains yield is:

Capital gains yield = k - g = 41.54% - 1.27% = 40.27%

So, the expected capital gains yield for the stock of Halestorm, Inc. is 40.27%.