Final answer:
The expected dividend on TOYS4U stock is calculated by deducting the capital gains yield from the total return to find the dividend yield, and then multiplying the current stock price by the dividend yield. The next expected dividend is therefore $3.50.
Step-by-step explanation:
To calculate the expected dividend on TOYS4U stock, we must understand how dividend yield correlates with the stock's total expected return. The stock's total return is the sum of the capital gains yield and the dividend yield. In this case, we know that similar stocks return 15%, and a capital gains yield of 10% is expected for TOYS4U stock.
Therefore, we can calculate the dividend yield using the following formula:
Total Return = Dividend Yield + Capital Gains Yield
15% = Dividend Yield + 10%
Dividend Yield = 15% - 10% = 5%
Now, to find the next expected dividend, we multiply the dividend yield by the current stock price:
Expected Dividend = Stock Price × Dividend Yield
Expected Dividend = $70 × 5% = $3.50
The next expected dividend on the stock is therefore $3.50, which corresponds to option (b).