ABC Company has been growing at a 10% rate,and it just paid a dividend of Do= $3.00.Due to a new product,ABC expects to achieve a dramatic increase in its short-run growth rate,to 20% annually for the next 2 years.After this time growth is expected to return to the long-run constant rate of 10%.The company's beta is 2.0,the required return on an average stock is 11%,and the risk free rate is 7%.What should the dividend yield (D1/Po)be today? (Round to the nearest whole percent.)

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Quizplus · Accepted Answer

Step 1 - Calculate the required rate of return using CAPM. k_e = k_F + β(k_M - k_F ) k_e= .07 + 2.0(.11 - .07) k_e = 15% Step 2 - Calculate the present value of the high-growth cash flows. PV = 11ea7fdb_fbf3_8f74_a768_0b2377384b66_TB2902_11 = $3.13 PV = 11ea7fdb_fbf3_b685_a768_a72aa15915c3_TB2902_11 = $3.27 Step 3 - Add these cash flows together.3.13 + 3.27 = $6.40 Step 4 - Calculate the constant-growth cash flows and discount them back to today. 11ea7fdb_fbf3_b686_a768_9380077520ec_TB2902_11 = 11ea7fdb_fbf3_b687_a768_93452c10f696_TB2902_11 11ea7fdb_fbf3_b688_a768_c36346bd0873_TB2902_11 = 11ea7fdb_fbf3_b689_a768_bb86b15f0c02_TB2902_11 = $95.04 PV = 11ea7fdb_fbf3_b68a_a768_37c837ab67eb_TB2902_11 = $71.86 Step 5 - Add the two discounted totals together to get the stock price today.6.40 + 71.86 = $78.26 Step 6 - Calculate the dividend yield. Dividend Yield = 11ea7fdb_fbf3_dd9b_a768_6fc4e4d318ec_TB2902_11 = 4.6%

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