Suppose you know a company's stock currently sells for $70 per share and the required return on the stock is 13 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

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Business

Keith Decker

21 July, 12:56

Suppose you know a company's stock currently sells for $70 per share and the required return on the stock is 13 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

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Heidi Boyd · Answer 1

Total return on the stock is evenly divided between a capital gains yield and a dividend yield. So capital gain yield is 6.5% and dividend yield is 6.5%

Expected return = Dividend yield + Capital gain yield = D0 * (1+g) / P0 + g

0.13 = D0 (1+0.065) / 70 + 0.065

D0*0.015 = 0.065

D0 = $4.33

So the current dividend per share is $4.33