Question

The market price for Microsoft Corporation closed at $55.48 and $46.45 on December 31, current year, and previous year, respectively. The dividends per share were $1.24 for current year and $1.12 for previous year.

a. Determine the dividend yield for Microsoft on December 31, current year, and previous year. Round percentages to two decimal places.

b. Interpret these measures

Answer 1

Dividend yield : This is the ratio that compares the amount of dividends paid to the market price.

Formula for dividend yield

Dividend yield = Dividend price per share of common stock / Market price per share of common stock

Calculation of Dividend yield for Microsoft corporation for current year if annual dividend of common stock was $1.24 per share  and market price per share of common stock was $55.48

Dividend Yield  = Dividend per share of common stock / Market price per share of common stock

=$1.24 / $55.48

=0.0224 or 2.24%

Calculation of Dividend yield for Microsoft Corporation for previous year,if annual dividend of common stock was  $1.12 per share and market price per share of common stock was $46.45

Dividend yield = Dividend per share of common stock / Market price per share of common stock

=$1.12 / $46.45

=0.0241 or 2.41%

Despite an increase in dividend per share from $1.12 to $1.24, the dividend yield fell from 2.41% to 2.24%. This is due to an increase in the market price per share.