Question

Suppose you know that a company’s stock currently sells for $56 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Current dividend per share =$2.67

Step-by-step explanation:

`Total Return = Div yield + Capital gain yield = 10%\\`

But from the question

`Dividend yield = Capital gains yield`

therefore
`Dividend yield =(0.1)/(2) = 0.05`

`Dividend yield = (D1)/(P0)`

therefore:
`D1=P0*Dividend yield = 56*0.05=$2.80\\`

the question however is not asking for D1 but D0.

and
`D1= D0(1+g)`

`g=ke-(D1)/(P0) = 0.1 - \frac/{2.8}{56} = 0.05`

therefore
`D0=(2.8)/(1.05) = $2.67`