Shares of common stock of the Samson Co. offer an expected total return of 12%. The dividend is increasing at a constant 8% per year. The dividend yield must be:
A) -4%.
B) 4%.
C) 8%.
D) 12%.
E) 20%.

Question

Quizplus · Accepted Answer

The expected total return of 12% can be divided into the dividend yield and the capital appreciation rate. Since the dividend is increasing at a constant rate of 8% per year, we can use the Gordon growth model to calculate the dividend yield:

Dividend Yield = (Expected total return - Dividend growth rate) = 12% - 8% = 4%

Therefore, the dividend yield is 4%.

Shares of Common Stock of the Samson Co