Question

Yum! Brands just paid an annual dividend of $2.20 a share and is expected to increase that amount by 2.2 percent per year. What price should you expect to pay per share if the market rate of return for this type of security is 14 percent at the time of your purchase? a. $19.89 b. $18.16 c. $19.47 d. $20.20

Answer 1

option (c) $19.47

Step-by-step explanation:

Data provided in the question:

Annual divided just paid, D0 = $2.20

Growth rate = 2.2% = 0.022

Required rate of return = 14% = 0.14

Now,

Current price of the share = [ D0 × ( 1 + g )² ] ÷ [ r - g ]

= [ $2.20 × ( 1 + 0.022 )² ] ÷ [ 0.14 - 0.022 ]

= $2.2978648 ÷ 0.118

= $19.47

Hence,

The answer is option (c) $19.47