Suppose you know that a company’s stock currently sells for $63 per share and th

Question

Suppose you know that a company’s stock currently sells for $63 per share and the required return on the stock is 10.5%. 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? Suppose you know that a company’s stock currently sells for $63 per share and the required return on the stock is 10.5%. 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?

Explanation / Answer

Capital gains yield=Dividend yield=(10.5/2)=5.25%

Dividend yield=Annual dividend/Current price

Hence annual dividend=($63*5.25%)=$3.3075

Hence current dividend per share=D1*Present value of discounting factor(rate%,time period)

=$3.3075/1.0525

=$3.14(Approx).

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