## Thursday, 31 July 2014

### Suppose you know that a company’s stock currently sells for \$66.90 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield.

Suppose you know that a company’s stock currently sells for \$66.90 per share and the required return on the stock is 9 percent. You also know that the total return on the stock is evenly divided between capital gains yield and dividend yield.

 Required: If it’s the company’s policy to always maintain a constant growth rate in its dividends, what is the current dividend per share? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation:
 We know the stock has a required return of 9 percent, and the dividend and capital gains yield are equal, so:

 Dividend yield = 1/2(.09) Dividend yield = .045 = Capital gains yield

 Now we know both the dividend yield and capital gains yield. The dividend is simply the stock price times the dividend yield, so:

 D1 = .045(\$66.90) D1 = \$3.01

 This is the dividend next year. The question asks for the dividend this year. Using the relationship between the dividend this year and the dividend next year:

 D1 = D0(1 + g)

 We can solve for the dividend that was just paid:

 \$3.01 = D0(1 + .045) D0 = \$3.01 / 1.045 D0 = \$2.88