For the past five years, the price of Microprocessors, Inc. stock has been increasing at a rate of 9 percent a year. Currently, the stock is priced at $56 a share and has a required return of 13 percent. What is the dividend yield?
Dividend Yield :
The dividend yield is the ratio of the annual dividend relative to the current stock price. The higher the dividend yield, the lower is the stock's price and the lower the dividend yield, the higher is the stock price.
Answer and Explanation:
The dividend yield for Microprocessors, Inc's stock is 4%.
As per the data shared by Microprocessors, Inc:
- Constant growth rate, g = 9%
- Current stock price = $56
- Required return, r = 13%
The first step is to determine the next dividend D1:
- P0 = D1 / (r - g)
- D1 = $56 * (13% - 9%)
- D1 = $2.24
The second step is to determine the dividend yield:
- Dividend yield = D1 / P0
- Dividend yield = $2.24 / $56
- Dividend yield = 4%
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from Corporate Finance: Help & ReviewChapter 2 / Lesson 10