Question

Ace-Pak currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher ________ than the stock of Ace-Pak.

Answer 1

Ace-Pak currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher Current price and Capital gain yield than the stock of Ace-Pak.

Note:

1) Growth rate represents the capital gain yield and required rate of return less capital gain yield reresents dividend yield.

So, let us assume the required rate of return is 10%, then Dividend yield of Ace-pak will be 7.25% (10%- 2.75%) and current price will be $20.14 ($1.46 / 7.25%) and the dividend yield of Northern Culture will be 6.90% (10%-3.1%) and current price will be $20.58 ($1.42/6.90%).

2) Price of stock = Dividend / (Required rate of return - Growth rate).