Final answer:
To calculate the dividend yield of Sanders Corp., a constant growth stock paying a $3.18 dividend with a 15% expected return, you use the dividend discount model (DDM) to first determine the stock price and then divide the expected dividend by this price to find the yield, which is 9%.
Step-by-step explanation:
If you are considering the purchase of Sanders Corp., a constant growth stock, and need to calculate its dividend yield with a recent dividend of $3.00 and an expected next dividend of $3.18, given a 15% return, you would first note that dividend yield is calculated as the dividend per share divided by the stock's price per share. In this problem, since the required rate of return (15%) is given, you can use this to calculate the price per share using the dividend discount model (DDM). The DDM formula is Price = Dividend / (Required Rate of Return - Growth Rate). We have the expected next dividend (D1 = $3.18) and we can find the constant growth rate (g) by looking at the recent dividend of $3.00, calculated as ($3.18 - $3.00) / $3.00 = 0.06 or 6%. With these values, the price of the stock (P0) = $3.18 / (0.15 - 0.06) = $35.33. The dividend yield is then the expected dividend divided by the price, which gives us Dividend Yield = $3.18 / $35.33 = 0.09, or 9%.