Question

Suppose you know a company's stock currently sells for $70 per share and the required return on the stock is 14 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

Answer: $4.58

Step-by-step explanation:

The required return is said to be evenly divided between a capital gains yield and a dividend yield.

That means that Dividend Yield = 7%

Capital gains yield = 7%

The Dividend Yield is based on the next dividend and given the expected return the dividend is;

Expected Return = Dividend Yield + Capital gains yield

Expected Return = Dividend(1 + g)/stock price + Capital gains yield

0.14 = Dividend ( 1 + 0.07)/70 + 0.07

70 * (0.14 - 0.07 ) = Dividend ( 1.07)

4.9 = Dividend ( 1.07)

Dividend = 4.9/1.07

Dividend = $4.58