Question

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

Answer 1

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