Suppose you know that a company’s stock currently sells for $65.60 per share and

Question

Suppose you know that a company’s stock currently sells for $65.60 per share and the required return on the stock is 10 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? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Suppose you know that a company’s stock currently sells for $65.60 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield.

Explanation / Answer

Answer:

Given Current Price (P0) =$65.60

Required rate of return (Ke) = 10% = 0.10

Dividend Payout ratio (b) =1/2=0.5

Growth rate (g) = Ke* (1-b)

= 0.10 * (1-0.5)

=0.05

Using the formula :

P0 = Current Dividend * (1+g) / (ke-g)

65.60 = Current Divided ( (1+0.05) / (0.10-0.05)

Current Dividend = 65.60*0.05 / 1.05

=$3.12 Per share

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