Calculating Expected Share Price of Yum! Brands

What price should you expect to pay per share if the market rate of return for this type of security is 14 percent at the time of your purchase?

a. $19.89 b. $18.16 c. $19.47 d. $20.20

Answer:

Option (c) $19.47

Yum! Brands just paid an annual dividend of $2.20 a share and is expected to increase that amount by 2.2 percent per year. To calculate the expected share price, we need to consider the current dividend, growth rate, and required rate of return.

Given data:

Annual divided just paid, D0 = $2.20

Growth rate = 2.2% = 0.022

Required rate of return = 14% = 0.14

Using the formula to calculate the current price of the share:

Current price of the share = [ D0 × (1 + g)² ] ÷ [r - g]

= [ $2.20 × (1 + 0.022)² ] ÷ [0.14 - 0.022]

= $2.2978648 ÷ 0.118

= $19.47

Therefore, the expected price per share of Yum! Brands under these conditions would be $19.47, which corresponds to option (c) in the choices provided.