Question

# Suppose you know a company's stock currently sells for \$60 per share and the required return...

 Suppose you know a company's stock currently sells for \$60 per share and the required return on the stock is 10 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?

Multiple Choice

• \$2.71

• \$5.71

• \$3.05

• \$2.86

• \$3.00

Current market price= \$60

Required rate of return= 10% = \$6

Since the return on the stock is evenly divided between a capital gains yield and a dividend yield. It implies that the capital gain and dividend yield both would be 10% divided by 2

(that means it would be 5% each)

The capital gain yield and the dividend = 5% of \$60

= \$3

The \$3 shall be the dividend for the next year. The current dividend can be found establishing a relationship with the dividend for the next year.

As the growth rate is constant it means that

Dividend next year= Dividend current year (1+ growth rate)
\$3.00 = Dividend current year (1 + 5%)

Dividend current year= \$3.00 / 1.05

= \$2.86

So, the current answer is OPTION-4th- \$2.86

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