Question

Collins Corporation is expected to pay a cash dividend on its common stock of $2.20 per share in one year, $2.45 per share in two years, and a dividend of $2.60 per share in three years. Your analysis indicaes that you think you will sell the stock for a market price of $34.50 per share in three years. The current risk-free rate is 2.20% while the appropriate rate of return for the risks involved in owning Collins corporation stock is 10.75% What will be the dividend yield for the first year (rounded to two decimal places)

Answer 1

Current Value of the Collins Corporation = Present Value of 3 year Dividend + Present Value of Stock Price at the of 3rd year

= 2.20/1.1075^1 + 2.45/1.1075^2 + 2.60/1.1075^3 + 34.50/1.1075^3

= $31.30 per share

Working:

Year	Expected Dividend	DF @ 10.755	Present Value
1	2.2	0.902934537	1.99
2	2.45	0.815290779	2.00
3	2.6	0.736154202	1.91
	34.5	0.736154202	25.40
Current Value of the Collins Corporation	31.30

.

Dividend yield for the first year = D1/Current Value of the Collins Corporation

= 2.20/31.30

= 0.0703

= 7.03%