Chapter 13, Problem 15E

To determine

Concept Introduction:

Dividend yield:

Dividend yield can be defined as the measure in which the cash dividend is expressed as a percentage of the current market price. This is calculated in order to know the return earned or the yield generated by the share depending on their current market price.

Dividend yield is calculated as under $–$

$DividendYield=\frac{Annualcashdividendpershare}{Marketvaluepershare}$

Income stock:

Income stock is the stock which has a steady or a return or a yield which can be equal to near to the current market yields. Income stocks means regular dividends are paid as per the industry or an appropriate amount income is distributed among the shareholders.

Growth stock:

Growth stock can be defined as the stock, when not much income is distributed to the stockholders rather most of the income is kept for operations or future options.

Requirement 1

To compute:

Dividend yield for $–$

1. Company 1

2. Company 2

3. Company 3

4. Company 4

Answer to Problem 15E

Solution:

Dividend yield for $–$

1. Company 1 = 7.30%

2. Company 2 = 10.5%

3. Company 3 = 5.5%

4. Company 4 = 0.6%

Explanation of Solution

The above answers can be explained as under $–$

Dividend yield is calculated as $–$

$DividendYield=\frac{Annualcashdividendpershare}{Marketvaluepershare}$

The dividend yield for each company is $–$

Company 1

Given,

• Annual cash dividend per share = $ 16.06

• Market value per share = $ 220

$\begin{array}{l}DividendYield=\frac{Annualcashdividendpershare}{Marketvaluepershare}\\ DividendYield=\frac{\$16.06}{\$220}\\ DividendYield=7.30\%\end{array}$

Company 2

Given,

• Annual cash dividend per share = $ 13.86

• Market value per share = $ 132

$\begin{array}{l}DividendYield=\frac{Annualcashdividendpershare}{Marketvaluepershare}\\ DividendYield=\frac{\$13.86}{\$\text{ 13}2}\\ DividendYield=10.5\%\end{array}$

Company 3

Given,

• Annual cash dividend per share = $ 3.96

• Market value per share = $ 72

$\begin{array}{l}DividendYield=\frac{Annualcashdividendpershare}{Marketvaluepershare}\\ DividendYield=\frac{\$\text{ 3}.96}{\$\text{ 7}2}\\ DividendYield=5.5\%\end{array}$

Company 4

Given,

• Annual cash dividend per share = $ 0.48

• Market value per share = $ 80

$\begin{array}{l}DividendYield=\frac{Annualcashdividendpershare}{Marketvaluepershare}\\ DividendYield=\frac{\$\text{ 0}.48}{\$\text{ 8}0}\\ DividendYield=0.6\%\end{array}$

Conclusion

Thus, the dividend yield for all the companies have been calculated.

To determine

Requirement 2

To classify:

Stock which would not be classified as an income stock

Answer to Problem 15E

Solution:

Stock which would not be classified as an income stock is Company 4’s stock.

Explanation of Solution

The above answer can be explained as under as the dividend yield is very low i.e. 0.6%. 0.6% is very less when compared with industry yields, and income stocks are the stock which has a steady or a return or a yield which can be equal to near to the current market yields. Income stocks means regular dividends are paid as per the industry or an appropriate amount income is distributed among the shareholders.

So, the stock of Company 4, will not be classified as income stock.

Conclusion

Thus, the stock of Company 4, will not be classified as income stock.