Question

Suppose you know that a company’s stock currently sells for $78 per share and the required return on the stock is 10.9 percent. you also know that the total return on the stock is evenly divided between capital gains yield and 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? note: do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.

Answer 1

To find the current dividend per share, we need to split the total return on the stock into the capital gains yield and dividend yield. The dividend yield can be calculated by subtracting the capital gains yield from the required return and solving for x. The current dividend per share is 5.45% of the stock price, which is $4.25 (rounded to 2 decimal places).

Step-by-step explanation:

To find the current dividend per share, we need to split the total return on the stock into the capital gains yield and dividend yield. We know that the total return is evenly divided between the two.

Given that the required return on the stock is 10.9 percent and the total return is evenly divided, we can calculate the dividend yield by subtracting the capital gains yield from the required return. So, the dividend yield is (10.9% - x) / 2 = x / 2, where x is the dividend yield.

To find x, we can solve the equation (10.9% - x) / 2 = x / 2 for x. Multiplying both sides by 2, we get 10.9% - x = x. Adding x to both sides, we have 10.9% = 2x. Dividing both sides by 2, we get x = 10.9% / 2 = 5.45%.

Therefore, the current dividend per share is 5.45% of the stock price, which is $78 * 5.45% = $4.25 (rounded to 2 decimal places).