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?
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:
The required return of the company's stock is 7.85%.
As per the data:
- Constant dividend growth rate, g = 3%
- Dividend yield = 4.85%
- Required return = Dividend yield + Constant growth rate
- Required return = 4.85% + 3%
- Required return = 7.85%
Dividend yield = (Dividend / Current share price)
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from Corporate Finance: Help & ReviewChapter 2 / Lesson 10