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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