A company is expected to maintain a constant 3 percent growth rate in its dividends indefinitely....

Question:

A company is expected to maintain a constant 3 percent growth rate in its dividends indefinitely. If the company's stock has a dividend yield of 4.85 percent, what is the required return on the stock?

Dividend Yield:

The dividend yield is the ratio of the annual dividend per share relative to the current price per share and it is expressed as a percentage. It simply indicates the return from equity investment by considering only the dividends received over a period of time. Company's that offer high dividend yield usually have declining stock prices and vice-versa.

Answer and Explanation:


Answer:

The required return of the company's stock is 7.85%.

Explanation:

As per the data:

  • Constant dividend growth rate, g = 3%
  • Dividend yield = 4.85%

Computation:

  • Required return = Dividend yield + Constant growth rate
  • Required return = 4.85% + 3%
  • Required return = 7.85%

Note:

Dividend yield = (Dividend / Current share price)


Learn more about this topic:

Loading...
What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
4.7K

Related to this Question

Explore our homework questions and answers library