Question

Given the information in the table, what is the dividend yield from t=0 to t=1? Today’s Dividend $3.11 Discount Rate 7.66% Growth rate in dividends 0 to 1 7.89% Growth rate in dividends 1 to 2 8.38% Growth rate in dividends 2 to 3 9.29% Growth rate in dividends 3 onward 4.14%

Answer 1

Price of stock = PV of CFs from it.

Div Calculation:

Year	Cash Flow / Div	Formula	Calculation
1	$                     3.36	D0 ( 1 + g)	3.11 ( 1 + 0.0789 )
2	$                     3.64	D1 ( 1 + g)	3.36 * ( 1 + 0.0838 )
3	$                     3.97	D2 ( 1 + g)	3.64 * ( 1 + 0.0929 )
4	$                     4.14	D3 ( 1 + g)	3.97 * ( 1 + 0.0414 )

Price after 3 Years:

Price of Stock is nothing but PV of CFs from it.
P3 = D4 / [ Ke - g ]
= $ 4.14 / [ 7.66 % - 4.14 % ]
= $ 4.14 / [ 3.52 % ]
= $ 117.58

P3 - Price after 3 Years

D4 - Div after 4 Years

Ke - required Ret

g - Growth Rate

Price today:

Year	Particulars	Cash Flow	PVF @7.66 %	Disc CF
1	D1	$      3.36	0.9289	$              3.12
2	D2	$      3.64	0.8628	$              3.14
3	D3	$      3.97	0.8014	$              3.18
3	P3	$ 117.58	0.8014	$           94.23
Price				$         103.67

Price today is $ 103.67

Div Yield = Expected div / Price

= $ 3.36 / 103.67

= 0.0286 I.e 2.86%

Div yield is 2.86%