Question

Suppose you know that a company’s stock currently sells for $70 per share and the required return on the stock is 15 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

Since the required return is equally divided between dividend yield and capital gain yield so Dividend yield = 152= 7.5%

Dividend yield =Dividend next year /current price

.075 = D1/70

   D1= .075 *70 = $ 5.25

Current dividend = D1/(1+g)

                = 5.25/(1+.075)

               = $ 4.88 per share

**Current price = D1/(Rs-g)

     70 = 5.25 /(.15-g)

     (.15-g) = 5.25/70

      .15 -g = .075

       g = .15 -.075 = .075 or 7.5%