You expect a share of stock to pay dividends of $1.50, $1.65, and $1.90 in each

Question

You expect a share of stock to pay dividends of $1.50, $1.65, and $1.90 in each of the next 3 years. You believe the stock will sell for $23.00 at the end of the third year. a. what is the stock price if the discount rate for the stock is 10%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price b. What is the dividend yield for year 1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Dividend yield c. What will be the dividend yield at the start of year 2? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Dividend yield

Explanation / Answer

Year Cash flow PV factor Present Value 1 1.5         0.909           1.36 2 1.65         0.826           1.36 3 1.9         0.751           1.43 3 23         0.751         17.28 Total Of present Values         21.44 So the share price today is 21.44 Dividend yield for Year 1 =Dividend paid in First year/Share price today =Dividend paid in First year/Share price today =1.50/21.44 7.00% For dividend Yield for Year 2 let's calculate the share price at the beginning of year 2 Year Cash flow PV factor Present Value 1 1.65         0.909           1.50 2 1.9         0.826           1.57 3 23         0.751         17.28 Total Of present Values         20.35 Dividend yield at the start of year 2 =Dividend paid in year 2 /Share price at staring of year 2 =1.65/20.35 8.11%

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