Suppose the dividend yield is currently 5%. If annualized short term nominal interest rates are 6%,expected inflation is 1% per year,and the equity risk premium is 3%,then annual dividend growth is expected to be

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Quizplus · Accepted Answer

The dividend yield is the expected dividend divided by the current stock price. The expected dividend is the current dividend multiplied by (1 + dividend growth rate). The current dividend is the dividend yield multiplied by the current stock price. Substituting these into the dividend yield formula, we get:dividend yield = (current dividend * (1 + dividend growth rate)) / current stock price0.05 = (current dividend * (1 + dividend growth rate)) / current stock price0.05 = (current dividend * (1 + dividend growth rate)) / 1000.05 = current dividend * (1 + dividend growth rate) / 1000.05 * 100 = current dividend * (1 + dividend growth rate)5 = current dividend * (1 + dividend growth rate)5 / current dividend = 1 + dividend growth rate4 / current dividend = dividend growth ratedividend growth rate = 4 / current dividendThe current dividend is the dividend yield multiplied by the current stock price. Substituting this into the dividend growth rate formula, we get:dividend growth rate = 4 / (dividend yield * current stock price)dividend growth rate = 4 / (0.05 * 100)dividend growth rate = 4 / 5dividend growth rate = 0.8Therefore, the annual dividend growth is expected to be 0.8%, or 1%.

Suppose the Dividend Yield Is Currently 5