You know that a company's stock currently sells for $62 per share and the required return on the...

Question:

You know that a company's stock currently sells for $62 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. It's the company's policy to always maintain a constant growth rate in its dividends.

What is the current dividend per share?

Total Return:

Total return is the combination of capital gain yield and dividend yield. The capital gain yield is expected price less current price divided by the current price. The dividend yield is dividend per share divided by the current price.

Answer and Explanation:

Given that stock price, {eq}P_{0} {/eq} = $62

Required return on stock, {eq}k {/eq} = 12%

Since the total return is evenly divided between capital gain yield and dividend yield i.e. {eq}g {/eq} = 6%

The current dividend per share, {eq}D_{0} {/eq} is computed using the following equation:

{eq}k = \displaystyle \frac{D_{0}(1+g)}{P_{0}}+g {/eq}

{eq}0.12 = \displaystyle \frac{D_{0}(1+0.06)}{62}+.06 {/eq}

{eq}D_{0} (1.06) = (0.12 - 0.06)*62 {/eq}

{eq}D_{0} = \$3.51 {/eq}

Hence, the current dividend per share is $3.51.


Learn more about this topic:

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What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
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