The required return on Latvia Co.'s stock is 12 percent and the dividend growth rate is 5 percent. The stock is currently selling for $55.50 a share. What is the dividend yield?
Dividend yield captures the rate of return investors get from a stock through dividend payments. Dividend yield is calculated as the ratio of dividend payments to current stock price.
Answer and Explanation:
We can use the dividend growth model to compute the dividend yield as follows:
- required return = dividend yield *(1 + dividend growth rate) + dividend growth rate
- 12% = dividend yield *(1 + 5%) + 5%
- 7% = dividend yield *(1 + 5%)
- dividend yield = 6.67%
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from Corporate Finance: Help & ReviewChapter 2 / Lesson 10