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a. A stock pays a constant annual dividend and sells for $28.80 a share. If the market rate of...

Question:

a. A stock pays a constant annual dividend and sells for $28.80 a share.

If the market rate of return on this stock is 7.2%, what is the dividend amount?

b. A stock pays a constant annual dividend and sells for $14.80 a share.

If the market rate of return on this stock is 5.2%, what is the dividend amount?

Dividend Yield:

The dividend yield is computed by dividing the annual dividend with the current stock price and is expressed as a percentage. It can be simply regarded as the return earned on a stock investment. A company with high dividend yields have a low stock price while a company with low dividend yields have a high stock price.

Answer and Explanation:


Answer:

a) The dividend amount is $2.07.

Explanation:

As per the information:

  • Current stock price, P0 = $28.80
  • Required return on the stock, Ke = 7.20%

Computation:

  • Required return on the stock = Constant annual dividend per share / Current share price
  • Constant annual dividend per share = $28.80 * 7.20%
  • Constant annual dividend per share = $2.07

b) The dividend amount is $0.77.

Explanation:

As per the information:

  • Current stock price, P0 = $14.80
  • Required return on the stock, Ke = 5.2%

Computation:

  • Required return on the stock = Constant annual dividend per share / Current share price
  • Constant annual dividend per share = $14.80 * 5.20%
  • Constant annual dividend per share = $0.77

Learn more about this topic:

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What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
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