Question

Assume a corporation has just paid a dividend of $ 4.75 per share. The dividend is expected to grow at a rate of 4.3% per year forever, and the discount rate is 8.9%.

What is the dividend yield of this stock?

Answer 1

The dividend yield is computed as shown below:

= Next Dividend per share / market price per share

Market price per share is computed as follows:

= Dividend just paid (1 + growth rate) / ( discount rate - growth rate)

= ($ 4.75 x 1.043) / (0.089 - 0.043)

= $ 4.95425 / 0.046

= $ 107.701087

Next dividend per share is computed as follows:

= Current dividend (1 + growth rate)

= $ 4.75 x 1.043

= $ 4.95425

So, the dividend yield is computed as follows:

= $ 4.95425 / $ 107.701087

= 4.6%

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