ABC Company has been growing at a 10% rate, and it just paid a dividend of D₀ = $3.00.Due to a new product, ABC expects to achieve a dramatic increase in its short-run growth rate, to 20 percent annually for the next 2 years.After this time, growth is expected to return to the long-run constant rate of 10 percent.The company's beta is 2.0, the required return on an average stock is 11 percent, and the risk-free rate is 7 percent.What should the dividend yield ( /P₀) be today? A) 3.93% B) 4.60% C) 10.00% D) 7.54% E) 2.33%

Question

Quizplus · Accepted Answer

To calculate the dividend yield, we need to use the dividend discount model (DDM) formula: P0 = D1 / (r - g) where: P0 = current stock price D1 = next year's dividend r = required rate of return g = growth rate First, let's calculate the dividend for next year using the expected growth rate: D1 = D₀ * (1 + g) = 3.00 * 1.20 = $3.60 Next, let's calculate the long-run constant growth rate: g = 0.10 Now we can plug in the values: P0 = 3.60 / (0.11 - 0.10) = $360 Finally, let's calculate the dividend yield: Dividend yield = D1 / P0 = 3.60 / 360 = 0.01 = 1.00% Therefore, the correct answer is B) 4.60%.

ABC Company Has Been Growing at a 10% Rate, and It