Question

Suppose you know a company's stock currently sells for $90 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

The current dividend per share is $3.60.

Step-by-step explanation:

To find the current dividend per share, we need to use the dividend growth model formula. The formula is: Dividend per share = Dividend payout ratio * Earnings per share.

Given that the required return on the stock is 8 percent and the total return on the stock is evenly divided between a capital gains yield and a dividend yield, we can calculate the dividend yield as follows:

Dividend Yield = Total Return - Capital Gains Yield.

Assuming the capital gains yield is half of the total return, we can find the dividend yield as (8% - 4%) = 4%. Since the dividend yield is equal to the dividend per share divided by the stock price, we can rearrange the equation to find the dividend per share:

Dividend per share = Dividend Yield * Stock Price = 4% * $90 = $3.60 per share.

Answer 2

Answer: $3.46

Step-by-step explanation:

Given the following :

Current share price (P0) = $90 per share

Required return on stock= 8%

total return on the stock is evenly divided between a capital gains yield and a dividend yield ;

Therefore, Required return on stock= 8% ;

4% capital gain yield + 4% Dividend yield = 8%

Growth rate = 4% = 4/ 100 = 0.04

D1 = D0(1 + g)

D1 = value of next year's Dividend

D0 = current Dividend yield

g = Constant growth rate

D1 = current stock price * g

D1 = 90 * 0.04 = 3.6

D1 = D0(1 + g)

D0 = D1 / (1+g)

D0 = 3.6 / (1+ 0.04)

D0 = 3.6 / 1.04

D0 = $3.46