Question

Foxburo Company expects to pay a \(2.34 per share cash dividend this year on its common stock. The current market value of Foxburo stock is \)32.50 per share. Compute the expected dividend yield on the Foxburo stock. Would you classify the Foxburo stock as a growth or an income stock? Explain

Short answer

The expected dividend yield on the Foxburo stock is 7.2%.Foxburo has a dividend yield of 7.2%, which implies it is an income stock.

Step-by-step solution

Meaning of Dividend Yield Ratio

The dividend yield ratio is the ratio that shows the dividend paid annually to shareholders in correspondence to the market value per share.

Computation of Dividend Yield

$\begin{array}{c}\mathbf{D}\mathbf{i}\mathbf{v}\mathbf{i}\mathbf{d}\mathbf{e}\mathbf{n}\mathbf{d}\mathbf{Y}\mathbf{i}\mathbf{e}\mathbf{l}\mathbf{d}\mathbf{=}\frac{\mathbf{A}\mathbf{n}\mathbf{n}\mathbf{u}\mathbf{a}\mathbf{l}\mathbf{D}\mathbf{i}\mathbf{v}\mathbf{i}\mathbf{d}\mathbf{e}\mathbf{n}\mathbf{d}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{s}\mathbf{h}\mathbf{a}\mathbf{r}\mathbf{e}}{\mathbf{M}\mathbf{a}\mathbf{r}\mathbf{k}\mathbf{e}\mathbf{t}\mathbf{V}\mathbf{a}\mathbf{l}\mathbf{u}\mathbf{e}\mathbf{P}\mathbf{e}\mathbf{r}\mathbf{S}\mathbf{h}\mathbf{a}\mathbf{r}\mathbf{e}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{2}\mathbf{.}\mathbf{34}}{\mathbf{\$}\mathbf{32}\mathbf{.}\mathbf{5}}\mathbf{\times }\mathbf{100}\\ \mathbf{=}\mathbf{7}\mathbf{.}\mathbf{2}\mathbf{\%}\end{array}$

Classification of Foxburo stock

If a company has stocks on which they pay a regular and large amount of dividends, it is known as an income stock.

In this case, the dividend yield is 7.2%, which means the company is paying dividend then the stocks of the company is considered to be income stock.