Question

In: Finance

Given the information in the table, what is the dividend yield from t=0 to t=1? Today’s...

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%

Solutions

Expert Solution

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%


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