Question

The expected rate of return on the common stock of Northwest Corporation is 14 percent. The stock’s dividend is expected to grow at a constant rate of 8 percent a year. The stock currently sells for $50 a share. Which of the following statements is most correct?

Select one: a. The stock’s dividend yield is 8 percent. b. The stock’s dividend yield is 7 percent. c. The current dividend per share is $4.00. d. The stock price is expected to be $54 a share in one year. e. The stock price is expected to be $57 a share in one year.

Answer 1

Answer:
Dividend Yield = Expected Return – Growth Rate
Dividend Yield = 14% - 8%
Dividend Yield = 6%

Dividend Yield = Expected Dividend / Current Price
0.06 = Expected Dividend / $50
Expected Dividend = $3.00

Expected Dividend = Current Dividend * (1 + Growth Rate)
$3.00 = Current Dividend * (1 + 0.08)
Current Dividend = $2.78

Current Price = $50
Expected Price = Current Price * (1 + Growth Rate)
Expected Price = $50 * (1 + 0.08)
Expected Price = $54

Correct Statement:
The Stock Price is expected to be $54 a share in one year.