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Suppose you know that a company’s stock currently sells for $65.10 per share and the required return on the stock is 12 percent. You also know that the total return on the stock is evenly divided between capital gains yield and 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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Answer:

The current dividend per share is $3.68.

Step-by-step explanation:

Explanation:

The required return is evenly divided between a capital gains yield and a dividend yield as provided:

Dividend yield = Total return × 50%

Dividend yield = 12% × 50%

Dividend yield = 6%

The second step is to determine the future dividend:

Dividend yield = Future dividend / Current share price

Future dividend = $65.10 × 6%

Future dividend = $3.91

The third step is to determine the current dividend:

Current dividend = Expected dividend / (1 + Constant growth rate)

Current dividend = $3.91 / (1 + 6%)

Current dividend = $3.68

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