Question

Suppose you know that a company’s stock currently sells for $67 per share and the required return on the stock is 10.8 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?

Answer 1

Current dividend per share = $3.43

Step-by-step explanation:

This can be calculated as follows:

Dividend yield = Capital gains yield = Required return on the stock / 2 = 10.8% / 2 = 5.40%, or 0.054

Dividend yield = Next period dividend / Current price per share ........... (1)

Substituting the relevant value into equation (1) and solve for Next period dividend, we have:

5.40% = Next period dividend / $67

Next period dividend = $67 * 5.4% = $3.618

Therefore, we have:

Current dividend per share = Next period dividend / (1 + Dividend yield)^Number of period = $3.618 / (1 + 0.054)^1 = $3.43