The CFO of General Electric corporation is deciding if his company should invest 500,000 shares of Lightbridges industries. They manufacture innovative smart led light systems for residential homes. Lightbridge industries' stock price is currently listed at $24.84 per share, and the expected dividend yield is 5.4%.
a) What is the expected value of the first dividend payment at the end of the year?
b) How would you use the dividend yield model to value the price of a stock if it presently does not pay dividends but is expected to pay dividends in the future?
Dividend growth model:
Dividend growth model refers to the model used to find out the required return of the stock or the price of the stock which pays perpetual dividends with a constant growth rate.
Answer and Explanation:
Dividend yield = Expected dividend / Current price
Dividend Yield = 5.4% = 0.054
Current price = $24.84
Expected dividend = 24.84 x 0.054 = $1.34136
If the company pays dividends in future then we would use the dividend yield model to find the price of the stock when the company starts paying dividends and then find the present value of such value to find the price today.
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from Finance 101: Principles of FinanceChapter 14 / Lesson 3