Suppose you know a company\'s stock currently sells for $90 per share and the re

Question

Suppose you know a company's stock currently sells for $90 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?

a.) $7.75

b.) $3.88

c.) $4.10

d.) $4.05

e.) $3.68

Suppose you know a company's stock currently sells for $90 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.

Explanation / Answer

Growth = Return * .5       [As .5% is for dividend yield and .5 is for capital gain (growth in prices of shares) ].

Current dividend = price * (return - g)

                       = 90 ( .09 - .045)

                       = 90 * .045

                      = 4.05

correct option is "D" -4.05

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