Suppose you know a company's stock currently sells for $80 per share and the required return on the stock is 9 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

Question

Business

Cordell Finley

28 November, 02:32

Suppose you know a company's stock currently sells for $80 per share and the required return on the stock is 9 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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Answers (1)

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Coke Zero · Answer 1

The the current dividend per share is $3.45

Explanation:

Solution

Recall that:

A company stock currently sells for = $80

the required return on the stock = 9%

The current dividend per share = ?

Now,

The dividend in year 1 pr D₁=80 * (9%/2) = 3.6

Thus,

The current dividend per share = 3.6 / (1+4.5%)

= 3.45