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?
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.
Dividend yield = Dividend/Current price = 0.55/9.15 = 6.01%
Dividend yield = Dividend/Current price = 0.10/8.10 = 1.23%
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from Corporate Finance: Help & ReviewChapter 2 / Lesson 10