Question

Suppose you know that a company's stock currently sells for $56 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 yleld and a dividend yleld. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current dividend per share

Answer 1

Divided yield = 1/2(return on stock)

Dividend yield = 1/2(.10)

Dividend yield = .05 = Capital gains yield

Because it's divided between capital gain and yield

D1= divided yield ( stock price)

D₁ = 0 .05($56)

D₁ = $2.80

Then current year divided is

D₁ = D₀(1 + g)

$2.80 = D₀(1 + .05)

D₀ = $2.80 / 1.05

D₀ = $2.67