Question

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Problem 8-6 Stock Valuation [LO1] Suppose you know that 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Current dividend per share

Answer 1

Dividend yield=Capital gains yield=(10/2)=5%

Dividend yield=Dividend for next period/Current price

Dividend for next period=(60*5%)=$3

Hence current dividend=Dividend for next period*Present value of discounting factor(rate%,time period)

=$3/1.05

=$2.86(Approx).