The required return on Latvia Co.'s stock is 12 percent and the dividend growth rate is 5...

Question:

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:

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%

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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