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sweet [91]
3 years ago
8

If the dividend yield for year one is expected to be 5% based on the current price of $50, what will year three dividend (DIV3)

be if dividends grow at a constant 4%
Business
1 answer:
Lina20 [59]3 years ago
8 0

Answer:

Div₃ = $2.81

Explanation:

dividend yield = current dividend / current stock price

0.05 = current dividend / $50

current dividend = $50 x 0.5 = $2.50

Div₀ = $.250

Div₁ = $2.50 x 1.04 = $2.60

Div₂ = $2.60 x 1.04 = $2.704 = $2.70

Div₃ = $2.704 x 1.04 = $2.81

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Explanation: In this question. there is need to apply the formula for determining the current market price of a common stock. The current market price of a common stock is a function of next dividend capitalised at the appropriate cost of equity plus growth rate. in addition, we need to make the next dividend the subject of the formula.

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