(Q19 IN TYPE B)WHAT SHOULD BE THE ANNUAL DIVIDEND YIELD FOR YEAR 3...

19. (Q19 in Type B)What should be the annual dividend yield for Year 3 of a stock if a $4 dividend per share was just paid, the stock has an annual required rate of return of 18%, and a constant dividend growth rate of 6%? A) 6.35% B) 7.57% C) 12.00% D) 13.48% Solution: C DIV

3

= DIV

0

x (1 + g)

³

= 4 x (1.06)3 = $4.7641 P

2

= DIV

3

/ (r-g) = $4.7641 / (.18 - .06) = $39.70 Î annual dividend yield for Year 3 = DIV

3

/P

2

= $4.7641/$39.70 = 12.00%