Question

S08-06 Stock Valuation (LO1) Suppose you know that a company's stock currently sells for $74 per share and the required return on the stock is 10.6 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

Given Dividend Yield = 10.6%/2 = 5.3%

Dividend in one year/Current Price = 5.3/100

                                                        = 0.053

D₁ = 0.053 x 74

      = $ 3.922

Current Dividend per share D₀ = D₁/(1+0.053)

                                  = $ 3.922 /1.053

                                  = $ 3.724