Question

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $54, then what is the stock's expected dividend yield for the coming year?

Answer 1

The stock's expected dividend yield for the coming year is calculated using the dividend growth model. With an initial dividend (D0) of $2.25, a growth rate (g) of 3.5%, and the current stock price (P0) of $54, the expected dividend yield comes out to approximately 4.31%.

Step-by-step explanation:

To calculate the stock's expected dividend yield for the coming year, we begin with the formula for dividend yield which is:

Dividend Yield = (D1 / P0) × 100

Here, D1 represents the dividend expected at the end of the first year, P0 is the stock's price at the beginning of the year, and the yield is expressed as a percentage. With the given values:

D0 (the dividend today) = $2.25

g (constant growth rate) = 3.5%

P0 (the current stock price) = $54

D1 (the expected dividend for next year) will be calculated using the dividend growth model:

D1 = D0 × (1 + g) = $2.25 × (1 + 0.035) = $2.33 approximately

Now, using D1 and P0, we can find the expected dividend yield:

Expected Dividend Yield = ($2.33 / $54) × 100 = 4.31%

Therefore, the stock's expected dividend yield for the coming year is approximately 4.31%.

Answer 2

4.31%

Step-by-step explanation:

The computation of the expected dividend yield is shown below:

As we know that

Dividend yield = (Annual dividend ÷ Market price) × 100

where,

Annual dividend would be

= $2.25 + $2.25 × 3.5%

= $2.25 + 0.07875

= $2.32875 per share

And, the market price is $54 per share

So, the expected dividend yield is

= ($2.32875 per share ÷ $54 per share) × 100

= 4.31%