Question

Dee's Fashions has a constant growth rate of 5.3 percent and is equally as risky as the market while its stock is currently selling for $48.93 a share. The overall stock market has a return of 12.2 percent and a risk premium of 5.6 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

Solution:

Expected rate of return on share is calculated using CAPM

=Risk free rate+Beta(Market risk premium)

Since share of Dee's Fashions is equally as risky as market,hence the beta of share must be equal to 1.Thus expected rate of return on share of Dee's Fashions is;

=(12.20%-5.6%)+1*(5.6%)

=12.20%

Now,we can calculate the dividend on shares with help of dividend growth model:

Share Price=Expected dividend/(Expected rate of return-growth rate)

Expected Dividend=Share Price*(Expected rate of return-growth rate)

= $48.93*(12.20%-5.30%)

=$3.37617

Thus, Expected dividend Yield is;

=(Expected dividend/Share Price)*100

=[$3.37617/$48.93]*100

=6.90%