Question

A stock is expected to pay a dividend next year of $1.7. The dividend amount is...

A stock is expected to pay a dividend next year of $1.7. The dividend amount is expected to grow at an annual rate of 4.4% indefinitely. Assuming a required return on the stock of 9.9% in the future, the dividend yield on the stock is ______%.

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Answer #1
Dividend yield = Annual dividend /Current value of stock
= $       1.70 / $    30.91
= 5.50%
Working;
As per dividend discount model, current value of stock is the present value of future dividend which is derived from the following formula.
Present value of future dividends = D1/(Ke-g) Where,
= 1.70/(9.9%-4.4%) D1 Next year's dividend $       1.70
= $    30.91 Ke Required rate of return 9.90%
g Growth rate in dividend 4.40%
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