Question

Dee's Fashions has a constant growth rate of 5.6 percent and is equally as risky as the market while its stock is currently selling for $40.94 a share. The overall stock market has a return of 10.6 percent and a risk premium of 2.0 percent. What is the Dee's Fashions expected dividend yield? Ender your answer as a whole number to the nearest .1%, thus an answer of 10.1% would be 10.1 rather than 10.1% or .101.

Answer 1

The dividend yield is computed as follows:

= Dividend / current price

Dividend is computed as follows:

Required return = (Dividend / current price) + growth rate

(Return on market - risk premium) + beta x risk premium = (Dividend / current price) + growth rate

(10.6% - 2%) + 1 x 2% = (Dividend / $ 40.94) + 5.6%

8.6% + 2% = (Dividend / $ 40.94) + 5.6%

5% = Dividend / $ 40.94

Dividend = $ 2.047

So, the dividend yield will be as follows:

= $ 2.047 / $ 40.94

= 5%

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