Suppose you know a company\'s stock currently sells for $60 per share and the re

Question

Suppose you know a company's stock currently sells for $60 per share and the required return on the stock is 12 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, the current dividend is $_________ per share. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

Suppose you know a company's stock currently sells for $60 per share and the required return on the stock is 12 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, the current dividend is $_________ per share. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Price,P=D1/(r-g)

where D1 is the expected dividend

P is the current share price

r is the cost of equity

Dividend yield=100*D1/P%

Capital gains yield=Dividends Yield=100*D1/P%

Total return=200%*D1/P

Hence, D1=12%*60/200%=3.6

P=D1/(r-g)

=>g=r-D1/P=0.12-3.6/60=0.06

So, growth rate is 6%

D1=6%

D1=D0*(1+g)

Hence, Current Dividend, D0=D1/(1+g)=3.6/1.06=3.40

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