8. The current dividend yield on Clayton\'s Metals common stock is 3.2 percent.

ID: 2711005 • Letter: 8

Question

8. The current dividend yield on Clayton's Metals common stock is 3.2 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

8. The current dividend yield on Clayton's Metals common stock is 3.2 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

8. The current dividend yield on Clayton's Metals common stock is 3.2 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?

Explanation / Answer

Growth Rate =( D1-D0)/D0

= (1.54-1.48)/1.48 i.e 4%

Dividend Yield = D1/P

0.032=D1/P

P= 1.54/0.032 i.e 48.125

P1= D1/Ke-G

48.125 = 1.54/Ke-4%

48.125Ke-1.925 = 1.54

Ke = 3.465/48.125 i.e 7.20%

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8. The current dividend yield on Clayton\'s Metals common stock is 3.2 percent.

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