Question

In: Finance

Suppose you know that a company's stock currently sells for $67 per share and the required...

Suppose you know that a company's stock currently sells for $67 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, what is the current dividend per share?

Solutions

Expert Solution

The total retum is evenly divided into the capital gain yield and dividend yield. Hence, the capital gain yield is \(6 \%\) and dividend yield is \(6 \%\).

Calculate the dividend per share as follows:

Expected return = Dividend yield + Capital gain yield

$$ \begin{aligned} &=\frac{D_{0} \times(1+g)}{P_{0}}+g \\ 0.12 &=\frac{D_{0} \times(1+0.06)}{\$ 67}+0.06 \\ D_{0} \times(1+0.06) &=(0.12-0.06) \times \$ 67 \\ D_{0} &=\frac{\$ 4.02}{1.06} \\ &=\$ 3.79 \end{aligned} $$

Therefore, the dividend per share is \(\$ 3.79\)


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