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. 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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25 April, 10:03

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. 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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Sophie · Answer 1

The current dividend is $5.23 per share

Explanation:

This return is divided equally between dividend yield and capital gains yield, in other words 7%each (14%/2)

Expected return=current dividend * (1+growth rate) / share price + growth rate

note the growth rate also represents capital gains yield

0.14=CD * (1+0.07) / 80+0.07

0.14-0.07=CD * (1.07) / 80

0.07*80=CD*1.07

5.6=CD*1.07

CD=5.6/1.07

CD=$5.23

Ultimately the current dividend is $5,23 per share a shown by solving the equation for current dividend above