Question

Suppose you know that a company’s stock currently sells for $74 per share and the required return on the stock is 9.9 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. It's the company’s policy to maintain a constant growth rate in its dividends. What is the current dividend per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Hint: First, compute the current dividend yield. Then, use that to compute the next dividend paid (in dollars per share). Then, using the constant dividend growth rate, compute the last dividend paid. The dividend is equal to the dividend yield multiplied by the stock price. Remember that the current stock price reflects future dividends, starting with D1, where D1 = D0(1 + g).

Answer 1

Dividend yield=Capital gains yield=(9.9/2)

=4.95%

Dividend yield=Dividend for next period/Current price

Dividend for next period=74*4.95%

=$3.663

Hence current dividend=Dividend for next period*Present value of discounting factor(rate%,time period)

=3.663/1.0495

=$3.49(Approx)