Question

You expect a share of stock to pay dividends of $2.00, $2.05, and $2.40 in each of the next 3 years. You believe the stock will sell for $32.00 at the end of the third year.

a. What is the stock price if the discount rate for the stock is 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the dividend yield for year 1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

c. What will be the dividend yield at the start of year 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Part 1:

Price of the stock = PV of Cash flows from that stock.

Part 2:

Div Yiled for Year1 = D1 / P0

= $ 2 / $ 29.36

= 0.0681 i.e 6.81%

Part 3:

Div Yiled for Year2 = D2 / P1

P1 = D2 / (1.1) + D3 / (1.1)² + P3 / (1.1)²

= 2.05 / (1.1) + 2.40 / (1.1)^2 + 32 / (1.1)^2

= $1.8636 + $ 1.9835 + $ 26.4463

= $ 30.2934

Div Yiled for Year2 = D2 / P1

= $ 2.05 / $ 30.2934

= 0.0677 i.e 6.77%