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Homework answers / question archive / Question a: The dividend yield on REI common stock is 2
Question a: The dividend yield on REI common stock is 2.1 percent. The company just paid a $1.45 annual dividend and announced plans to pay $1.5 next year. The dividend growth rate is expected to remain constant at the current level. a(I) What is the capital gain yield on this stock? (II) what is the required rate of return on this stock? (III) what is the market price of this stock? (B) Verison has just paid a dividend of $0.4 per share today. The company is expected to increase its dividends by 10% and 8% in the next two years, and then it will increase by 5% forever. If the discount rate is 10%, what will be the stock price 1 year from today?
a-1) Computation of Capital Gain Yield:
Capital Gain Yield = (Next Year Dividend - Current Dividend ) / Current Dividend
= ($1.5-$1.45)/$1.45
= $0.05 / $1.45
Capital Gain Yied = 3.45%
a-2) Computation of Required Rate of Return:
Required Rate of Return = Dividend Yield + Capital Gain Yield
= 2.1% + 3.45%
Required Rate of Return = 5.55%
a-3) Computation of Market Price of Stock:
Dividend yield = Dividend of current year / Market Price of Stock
2.1% = $1.45 / P0
P0 = $1.45 / 2.1%
P0 i.e. Market Price of Stock = $69.05 per share
b) Computation of Stock Price 1 Year from Today:
Stock Price 1 Year from Today = Current Stock Price*(1+Growth Rate)^1
= 9.04*(1+10%)^1
= $9.94
