Question

Suppose you know that a company’s stock currently sells for $55 per share and the required return on the stock is 8 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

Dividend per share $ 2.11

Step-by-step explanation:

Return = Dividend yield + Capital gains yield = 0.08

Since the dividend yield and capital gains yield are evenly divided, we have:

Dividend yield = Capital gains yield

0.08 / 2 = 0.04

Dividend yield and capital gains yield are both 0.04.

Next year dividend will be calculated as:

share Price x dividend yield

$ 55 x 0.04 = $2.2

Current dividend is calculated thus:

Removing the grow factor from next year dividend, we have:

2.2/(1+0.04)

= 2.2/1.04

= 2.11538

Therefore, current dividend is $2.11 per share.

Answer 2

Dividend per share $ 2.16

Step-by-step explanation:

Return = Dividend yield + Capital gains yield = 0.08

Dividend yield = Capital gains yield

Div yield 0.08 / 2 = 0.04

Next year dividend:

share Price x dividend yield

$ 55 x 0.04 = $2.2

Current dividend:

We remove the grow factor from next year dividend:

2.2 / (1+0.04) = 2,11538