Question

if expected return is 14%. the dividend is to grow at the rate of 8% it currently sells for $50 per share. what is the current dividend per share. what is the dividend yield

Answer 1

First we will calculate the next year's dividend by Gordon model by the following formula:

Share price = D1 / k -g

where, D1 is next years' dividend, k is the expected return = 14% and g is the growth rate = 8%, Share price = $50

Putting the values in the above equation, we get,

$50 = D1 / 14% - 8%

$50 = D1 / 6%

D1 = $50 * 6%

D1 = $3

For calculating current years' dividend, we will use the following present value formula:

PV = FV / (1 + r)ⁿ

where, FV = Future value = $3, which is the dividend after 1 year,  PV is current years' dividend , r is the rate of interest = 8% and n is 1 years

Now, putting these values in the above formula, we get,

PV = $3 / (1 + 8%)¹

PV = $3 / (1 + 0.08)

PV = $3 / (1.08)

PV = $2.77778

So, current year's dividend per share is $2.78.

Calculation of Dividend yield:

Dividend yield = Dividend per share / Market price per share * 100

Dividend yield = $2.78 / $50 * 100

Dividend yield = 5.56%.