Question

Suppose you know that a company's stock currently sells for $64 per share, and the required return on the stock is 14 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?

A) $5.44
B) $4.32
C) $3.84
D) $4.80

Answer 1

To find the current dividend per share, we use the constant growth rate formula. The dividend yield can be calculated by subtracting the capital gains yield from the required return. In this case, since the total return is evenly divided between the two components and the required return is 14 percent, the dividend yield is 0 percent. Therefore, the current dividend per share is $0.

Step-by-step explanation:

To find the current dividend per share, we need to use the constant growth rate formula. The constant growth rate is the sum of the capital gains yield and the dividend yield. Given that the total return is evenly divided between these two components and the required return is 14 percent, we can find the dividend yield as follows:

Dividend yield = Required return - Capital gains yield = 14% - 14% = 0%

Since the company's policy is to maintain a constant growth rate in its dividends, the current dividend per share is $0.