Suppose you know a company's stock currently sells for $33 per share and the required return on the stock is 0

Finance Nov 21, 2021

Suppose you know a company's stock currently sells for $33 per share and the required return on the stock is 0.13. 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 next dividend per share? Answer with 2 decimals (e.g. 1.23)

Expert Solution

Next Dividend per share = $2.15

Step-by-step explanation

The calculation is shown below:

Required return = Dividend yield + Capital gain yield

13% = 6.5% + 6.5%

D1 = next expected dividend

Current price = D1/(Required return - Capital gain yield)

$33 = D1/(13%-6.5%)

D1 = $33 * 6.5%

= $2.145

= $2.15

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