HOME HEALTH PRODUCTS, INC.

Homer Health Products, Inc. is a leading manufacturer of prescription and ethical drugs, specialty foods and candies, and proprietary drugs. Total revenues in the last fiscal year were in excess of $20 billion.

Long-Term Debt

The company has a capital structure that is made up of 34 percent long-term debt, 3 percent preferred stock, and 53 percent common stock. One of the two largest domestic long-term debt issues is a 9 1/8 percent coupon bond that is due in 26 years. This debenture is currently selling for $930. The bond is callable in seven years and if called will be redeemed at a premium of 104.4375. The other large publicly held bond is a 9 percent coupon bond that is due in nine years. This debenture is selling for $972.50. Both of these bonds are rated A by Moody’s.

Preferred Stock

The company has more than 3 million shares of preferred stock which were issued in connection with the acquisition of Princeton Drug Company. The preferred stock is a $2.75 cumulative preferred with a stated value of $30.50, but it is currently selling for $30. It has no voting rights unless the company is in arrears on six or more quarterly dividends, and then each shareholder is entitled to one-quarter vote per share. In the event of liquidation each share is entitled to $30.50 plus accrued dividends.

Common Stock

Returns from common stock come from the cash dividend payment and/or changes in the price of the stock. Investors receiving dividends can expect them to grow over time, but some stocks do not pay dividends, especially during their early growth years. As firms mature, they typically start paying dividends and then management is very reluctant to reduce the dividend. For the firms that do not pay dividends, the normal assumption is that the earnings are being retained by the firm to promote growth; thus, the stock price should grow at a higher rate than firms that have high payout ratios.

Two major factors that affect the price of stock are changes in the required rate of return, caused primarily by changes in the risk, and change in the growth rate of earnings, which in turn create changes in the growth rate of dividends.

The company currently has over 95 million shares of $3.125 par value common stock outstanding. A share of common stock presently sells for $40.63 and pays a quarterly dividend of $0.385. A consensus estimate indicates that earnings and dividends are expected to grow at an annual rate of 9.7 percent into the foreseeable future. The common shares have no preemptive rights. Stockholders have the opportunity to buy additional shares of common stock through a plan of automatic dividend reinvestment and optional cash purchase. This plan allows stockholders to have their dividends reinvested in shares of common stock, and they can purchase additional shares at the market price (with no commission) each month. Shareholders who participate in this plan are limited to a total of $1,000 per month that they can use to purchase additional shares.

QUESTION

What are the dividend yield and the capital gains yield for the company’s common stock?