Question

Stock Valuation Suppose you know that a company's stock currently sells for $64 per share and the required return on the stock is 13 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?

Answer 1

$3.85

Step-by-step explanation:

Calculation to determine the current dividend per share

First step is to calculate the Dividend yield using this formula

Dividend yield=Dividend for next period/Current price

Let plug in the formula

Dividend yield=(13%/2)

Dividend yield=6.5%

Second step is to calculate the Dividend for next period

Dividend for next period=($63*6.5%)

Dividend for next period=$4.095

Now let determine the Current dividend using this formula

Current dividend=Dividend for next period*Present value of discounting factor(rate%,time period)

Let plug in the formula

Current dividend=$4.095/1+.065

Current dividend=$4.095/1.065

Current dividend=$3.85(Approx).

Therefore the current dividend per share is $3.85