Question

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

a. 4.42%b. 4.66%c. 4.89%d. 5.13%e. 5.39%

Answer 1

Answer:

Option (b) is correct.

Explanation:

Given that,

D0 = $2.25

g (which is constant) = 3.5%

P0 = $50

Price = [D(1 + g)] ÷ Ke

Where,

Ke is the expected dividend yield for the coming year

$50 = [$2.25 × (1 + 0.035)] ÷ Ke

Ke = [$2.25 × (1 + 0.035)] ÷ $50

Ke = $2.32875 ÷ $50

     = 4.66%

Therefore, the stock's expected dividend yield for the coming year will be 4.66%.