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Company MNO has common stock with a market value of $9.15 and an annual dividend of $0.55....

Question:

Company MNO has common stock with a market value of $9.15 and an annual dividend of $0.55. Company PQR has common stock with a market value of $8.10 and an annual dividend of $0.10. As an investor, which company has the favorable yield?

a. MNO

b. PQR

Current yield of a stock

Usually, the term of current yield will be discussed when we invest in bonds, which is the fixed-income instrument. However, we could apply this term to stock as well, but we will name it as the dividend yield since it will be calculated by current dividend divided by the current price or market value. A higher dividend yield would be preferred since it means that the total cash flows received will be higher. However, if the dividend yield is extremely high due to lower market value, we should combine other factors in our consideration since the lower market price tells us that the investors have less expectation on this stock, which will reduce its liquidity on the market.

Answer and Explanation:

MNO would have the favorable yield.

MNO

Dividend yield = Dividend/Current price = 0.55/9.15 = 6.01%

PQR

Dividend yield = Dividend/Current price = 0.10/8.10 = 1.23%


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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