Suppose you know a company's stock currently sells for $69 per share and the required return on the stock is 0

Finance Oct 07, 2020

Suppose you know a company's stock currently sells for $69 per share and the required return on the stock is 0.14. You also know that the required return is evenly divided between the capital gains yield (G) and the dividend yield (D1/P0) (this means that if the required retun is 9%, the capital gains yield is 4.5% and the dividend yield is 4.5%).If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? Answer with 2 decimals (e.g. 1.23)

Expert Solution

Computation of Current Dividend per Share:

Given,

Required Rate of Return = 0.14

Dividend Yield = 0.14*0.50 = 7%

Growth Rate (g) = 7%

So,

Dividend for Next Year (D₁) = 0.07 * $69 = $4.83

Current Dividend per Share (D₀) = D₁ / (1 + g)

= $4.83/ (1+7%)

Current Dividend per Share (D₀) = $5.17

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