Question

The common share of Atlanta, corp., is selling for $42 a share and investors require a 15% return on the stock. If two thirds of the return on this stock are derived from dividends yield and the other one third is derived from capital gain yield. What is the amount of the current dividend D0

Answer 1

$4.00

Step-by-step explanation:

the required rate of return=dividend yield(2/3)+growth rate(1/3)

The dividend yield of the stock is defined as the expected dividend divided by the current share price

dividend yield=expected dividend(in 1 year)/share price

dividend yield=2/3*15%=10%

expected dividend=unknown

share price=$42

10%=expected dividend/$42

expected dividend=10%*$42=$4.20

expected dividend=D0*(1+g)

g=growth rate=1/3*15%=5%

$4.20=D0*(1+5%)

$4.20=D0*1.05

D0=$4.20/1.05

D0=$4.00