Question

Suppose you know that a company’s stock currently sells for $66.90 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield.

Required:1. If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

$2.88 per share

Step-by-step explanation:

The computation of the current dividend per share is shown below:

As we know that

Cost of equity = Next year dividend ÷ current stock price + growth rate

Since the cost of equity is 9%

So growth rate = 4.5%

And, the Next year dividend ÷ current stock price = 4.5%

Therefore, the next year dividend is

= $66.90 × 4.5%

= $3.0105

And, the current year dividend is

Next year dividend = Current year dividend × (1 + growth rate)

$3.0105 = Current year dividend × (1 + 4.5%)

So, the current year dividend is $2.88 per share