Question

You buy a share of Apple's stock at $20,000. At the end of this year, you will receive $2.00 as cash dividend. Dividend is expected to grow at 5% per year.

A. The dividend yield is __________.

B. The required rate of return _____________.

Answer 1

Dividend yield is the percentage of dividend paid per share to its market price.

Dividend yield = Dividend per share / market price

here,

market price= 20,000 $

Dividend = $ 2

Dividend yield = 2 / 20,000

= 0.0001

or

0.01 %

The required rate of return can be calculated with help of constant dividend growth model.

according to this -

where, Po is the current market price.
D1 = Dividend payable at the end of year by company.
g = Growth rate
Ke = cost of equity / required rate of return

Here,

Po = $ 20,000

D1 = 2 $

g = 5%

20,000 ( Ke - 0.05 ) = 2

Ke - 0.05 = 2 / 20,000

ke - 0.05 = 0.0001

Ke = 0.0001 + 0.05

= 0.0501

or 5.01 %

Required rate of return = 5.01 %

Hope it helps!