Suppose you know that a company’s stock currently sells for $65.80 per share and

Question

Suppose you know that a company’s stock currently sells for $65.80 per share and the required return on the stock is 11 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?

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

Since, dividend and capital yield are equal, the total return on the stock can be divided between the both. Therefore, the dividend yield would be 5.5% (11%/2). To calculate the current dividend per share, we need to use the dividend yield and current stock price per share.

Dividend Yield = Dividend Per Share at Year End or D1/Current Price Per Share

Therefore,

Dividend Per Share at Year End or D1 = Dividend Yield*Current Price Per Share

Once, we have obtained D1, we can calculate the current dividend per share with the use of growth rate as follows:

Current Dividend Per Share (D0) = D1/(1+Growth Rate)

_______________

Using the values provided in the question, we get,

D1 = 5.5%*65.80 = $3.619

Current Dividend (D0) = 3.619/(1+5.5%) = $3.43 per share (answer)

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