Question

102 15 Suppose you know a company's stock currently sells for $80 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. ings If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? 5.23 4.97 10.47 5.60 5.67 t- T-10

with process

Answer 1

A. $5.23

We know the stock has a required return of 10 percent, and the dividend and capital gains yield are equal, so:

Dividend yield = 1/2(0.14) = 0.07 = Capital gains yield

Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times the dividend yield, so:

D₁ = 0.07($80) = $5.6

This is the dividend next year. The question asks for the dividend this year. Using the relationship between the dividend this year and the dividend next year:

D₁ = D₀(1 + g)

We can solve for the dividend that was just paid:

$5.6 = D₀(1 + 0.07)

D₀ = $5.6 / 1.07 = $5.23