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If D0 = $1.05, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected...

Question:

If D0 = $1.05, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?

Expected Dividend Yield:

The expected dividend yield gives a relation between the dividend and the current stock price. It is the ratio of the annual dividend to the current price of the stock expressed as a percentage.

Answer and Explanation:


The expected dividend yield on a stock is calculated as:

  • {eq}\text{Dividend yield} = \dfrac{D1}{P0} \times 100{/eq}

Where:

  • P0 is the current price of the stock and,
  • D1 is the expected dividend for next year.

We are given that D0 = $1.05 and the dividend growth rate is constant at g = 4.7%. Thus, the expected dividend for next year will be equal to {eq}1.05\times 104.7\% = \$1.0035{/eq}. Thus, if the current price is P0 = $26, the expected dividend yield for next year is equa to:

  • {eq}\text{Dividend yield} = \dfrac{1.0035}{26} \times 100 = \boxed{4.23\%}{/eq}

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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