Nielson Motors has a share price of $25 today. If Nielson Motors is expected to

Question

Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of $0.75 this year, and its stock price is expected to grow to $26.75 at the end of the year, then Nielson's dividend yield and equity cost of capital are:

A) 3.0% and 7.0% respectively.

B) 3.0% and 10.0% respectively.

C) 4.0% and 6.0% respectively.

D) 4.0% and 10.0% respectively.

A) 3.0% and 7.0% respectively.

B) 3.0% and 10.0% respectively.

C) 4.0% and 6.0% respectively.

D) 4.0% and 10.0% respectively.

Explanation / Answer

Dividend yield = Dividend/Current stock price

= 0.75/25 = 3%

Equity cost of capital = (Stock price in year 1 - Stock price in year 0)/Stock price in year 0

= (26.75-25)/25 = 0.07 = 7%

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