Concept explainers
To determine: The dividend yield for each of the four stocks.
Introduction:
Dividend is a sum of money paid to the shareholders of the company. It is distributed among the investors from a portion of the company’s earnings.
Dividend yield is a ratio that specifies how much a company pays as dividends every year, on comparing with its share price. It is considered as the
Answer to Problem 32QP
The dividend yield of Stock W is 7%.
The dividend yield of Stock X is 17%.
The dividend yield of Stock Y is 22%.
The dividend yield of Stock Z is 10.34%.
Explanation of Solution
Given information:
Four different stocks have a required
The constant growth rate in dividends of Stock W is 10%.
The constant growth rate in dividends of Stock X is 0%.
The constant growth rate in dividends of Stock Y is -5%.
The constant growth rate in dividends of Stock Z is 20%.
Steps to determine the dividend yields and
- Firstly, determine the stock price for each stock. All the stocks have a required return of 17%, which is the sum of dividend yield and capital gains yield.
- After determining the stock price of each stock, use the stock price and dividend to compute the dividend yield of the four stocks.
- Finally, determine the capital gains yield for each stock by subtracting the dividend yield from the total return.
Formula:
The formula to calculate the price of a stock:
Where,
Po refers to the present value of a share of stock,
Do refers to the current year dividend paid,
R refers to the discount rate,
g refers to the constant growth of dividends.
The formula to calculate the dividend yield:
Where,
D1 refers to the next period dividend per share,
Po refers to the present value of a share of stock.
Compute the stock price of Stock W:
Hence, the stock price of the Stock W is $70.71.
Compute the dividend yield of the Stock W:
Hence, the dividend yield of the Stock W is 0.07 or 7%.
Compute the stock price of Stock X:
Hence, the stock price of Stock X is $26.47.
Compute the dividend yield of Stock X:
Hence, the dividend yield of Stock X is 0.17 or 17%.
Compute the stock price of Stock Y:
Hence, the stock price of Stock Y is $19.43.
Compute the dividend yield of Stock Y:
Hence, the dividend yield of Stock Y is 0.22 or 22%.
Compute the stock price in Year 2 of Stock Z:
Hence, the stock price in Year 2 of Stock Z is $145.152.
Compute the current stock price of Stock Z:
Hence, the stock price of Stock Z is $52.22.
Compute the dividend yield of Stock Z:
Hence, the dividend yield of the Stock Z is 0.1034 or 10.34%.
Want to see more full solutions like this?
Chapter 8 Solutions
Fundamentals Of Corporate Finance, Tenth Standard Edition
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education