JL Co. stock currently sells for $64 per share and the required return is 12 percent. The total return is evenly divided between the capital gains yield and the dividend yield. What is the current dividend per share if it's the company's policy to always maintain a constant growth rate in its dividends?

Question

Quizplus · Accepted Answer

Given that the total return is evenly divided between the capital gains yield and the dividend yield, and the required return is 12 percent, each yield contributes 6 percent. The dividend yield can be calculated as the dividend per share divided by the current stock price. Therefore, if the dividend yield is 6 percent (0.06), and the stock price is $64, the current dividend per share is $64 * 0.06 = $3.84. However, since the dividends are expected to grow at a constant rate (which is equal to the capital gains yield of 6 percent), we need to find the dividend that, when grown at 6 percent, would result in a price of $64 when discounted back at the required return of 12 percent. The correct calculation involves finding the dividend that fits this growth model, which is $3.62. This accounts for both the growth in dividends and the required return on investment.

JL Co Stock Currently Sells for $64 Per Share and the the Required