Question

Stock XYZ has a current dividend of $6.00 . The dividend is expected to grow at 4.00% per year until year 3 and then at 3.00% per year for the rest of time. Based on the riskiness XYZ, its discount rate is 7.00% . With this information, what is the dividend yield from today to year 1?

(A) 7.00%
(B) 3.73%
(C) 4.00%
(D) 4.12%
(E) 3.93%
(F) 3.07%

Answer 1

(E) 3.93%

Step-by-step explanation:

year cash flows pv @7% present value

1 $6.24 0.934579 $5.83

2 $6.49 0.87344 $5.67

3 $6.75 0.81630 $5.51

Price at year 3 $173.79 0.81630 $141.87

(6.75*1.03)/(0.07-0.03)

price today $158.88

Devidend yield = 6.24/158.88

= 3.93%

Therefore. The dividend yield from today to year 1 is 3.93%