Suppose you know a company's stock currently sells for $70 per share and the required return on the stock is 6 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. What is the current dividend if it's the company's policy to always maintain a constant growth rate in its dividends?

Question

Business

Frank

30 August, 02:59

Suppose you know a company's stock currently sells for $70 per share and the required return on the stock is 6 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. What is the current dividend if it's the company's policy to always maintain a constant growth rate in its dividends?

+5

Answers (1)

Know the Answer?

Gideon Quinn · Answer 1

Future dividend = $2.0388~ $2.04

Explanation:

The return on the shares is given as 0.06 of $70. And the returns are equally shared between capital gains and dividend.

Dividend = 0.06 : 2 = 0.03

Dividend = 0.03 * 70 = $2.10

Using the formula that related the present year dividend with next year dividend

Present dividend = Future dividend (1 + rate)

2.1 = Future dividend (1+0.03)

Future dividend = 2.1 : 1.03

Future dividend = $2.0388