The triangle store pays a constant dividend. Last year the dividend yield was 5.4% when the stock was selling for $18 a share. What must the stock price be today if the market currently requires a 3.8% dividend yield on this stock?
The yield is the return that a shareholder receives on his investment in the company's stock, in the form of dividends is called the dividend yield. There is an inverse relationship between the stock price and the dividend yield i.e the higher dividend yield that stock has, the lower is its current market price and vice-versa.
Answer and Explanation:
The triangle store's stock price today must be $25.58.
The triangle store shared the following data:
For last year:
- Dividend yield = 5.4%
- Stock price = $18 per share:
For the current year:
- Required dividend yield = 3.8%
- Current stock price =?
The first step is to determine the dividend last year as the company pays a constant dividend:
- Dividend yield = Annual dividend / Current stock price
- Annual dividend = $18 * 5.4%
- Annual dividend = $0.97
The second step is to determine the stock price for the current year:
- Current stock price = Annual dividend / Dividend yield
- Current stock price = $.97 / 3.8%
- Current stock price = $25.58
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from Corporate Finance: Help & ReviewChapter 2 / Lesson 10