Question

Pa-VaRoti Vines just paid a dividend of $3.55 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 15% per year for the next two years. However, after the second year, Pa-VaRoti Vine's dividend is expected to grow at a constant rate of 3.4% per year. The risk-free rate is 3%, the market risk premium is 4.6%, and Pa-VaRoti's beta is 1.45. What is the expected dividend yield for Pa-VaRoti's stock today?

Answer 1

Required rate = Risk free rate + beta ( market risk premium)

Required rate = 3% + 1.45 (4.6%)

Required rate = 9.67%

Year 1 dividend = 3.55 * 1.15 = 4.0825

Year 2 dividend = 4.0825 * 1.15 = 4.69488

Year 3 dividend = 4.69488 * 1.034 = 4.8545

Value at year 2 = D3 / required rate - growth rate

Value at year 2 = 4.8545 / 0.0967 - 0.034

Value at year 2 = 4.8545 / 0.0627

Value at year 2 = 77.4242

Value of stock today = 4.0825 / (1 + 0.0967)¹ + 4.69488 / (1 + 0.0967)² + 77.4242 / (1 + 0.0967)²

Value of stock today = 71.999

Dividend yield = (D1 / current stock price) * 100

Dividend yield = (4.0825 / 71.999) * 100

Dividend yield = 5.67%