Question

Company Z stock currently sells for $ 32.2. The required return on the stock is 21 %. Company Z maintains a constant 3 % growth rate in dividends.Company Z stock currently sells for $ 32.2. The required return on the stock is 21 %. Company Z maintains a constant 3 % growth rate in dividends.Calculate Company Z dividend yield? Express your answer as %.

Answer 1

Dividend yield

Dividend yield is the ratio of dividend that a company pays to its shareholders in relation to its current Stock price. It is calculated as a percentage by using following formula,

Dividend yield = Divident per share / Market value per share * 100

where dividend per share = Total annual dividend / No of shares outstanding

where market value per share = current price of share

Here first of all we should calculate dividend using Gordon constant growth model.

Gordon constant growth model

As per Gordon constant growth model, the fair price or current price of a stock is calculated as present value of future dividents discounted using cost of equity capital for the company. The equation is as follows,

P = D1 / r - g

Where P stands for Fair price / Stock price/ Current price

D1 stands for Dividend for next year which is calculated as,

D0(1+g)

where D0 stands for divident paid last year

g stands for expected growth rate

P = D1 / r - g

P = D0(1+g) / r - g

32.2=D0 (1+.03) / (.21-.03)

D0 (1+.03) = 32.2 * (.21-.03)

D0 = 32.2 * (.21-.03) / (1+.03)

D0 = 5.6272

Therefore Dividend yield can be calculated as,

Dividend yield = Divident per share / Market value per share * 100

Dividend yield = 5.6272 / 32.2*100

Dividend yield = 17.4757 %