Hi, I cannot understand this concept checker from schweser page 276 no 8 (this is the answer actually) Why is the dividend yield positively related to required rate of return and negatively related to the growth rate in dividends? Which formula can i use to get to the concept? Thanks
P = D/(r-g) P/E = D/E(r-g) so Dividend yield = D/E = P/E * (r-g) g increases D/E decreases … all else equal r increases D/E increases… all else equal
eros… you have not used D1 for your P equation (or have you). Dividend yield is D0/P0… Therefore D0/P0 =(r-g)/(1+r)
sorry messed it up totally. guess it was too late in the night for me to post. For some reason i thought dividend yield is the yield on the earnings and not on the price. Yep , your equation is correct i should have used D0. The relationships, however, obviously still hold. g increases D/P decreases … all else equal r increases D/P increases… all else equal (even though there is an offseting factor in the denominator)