Suppose you know that a company's stock currently sells for $65 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between 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?

Question

Quizplus · Accepted Answer

Using the constant growth model, we can find the current dividend per share:
$65 = D/(0.14-g), where D is the current dividend per share and g is the constant growth rate in dividends.
Since the total return is evenly divided between capital gains yield and dividend yield, we know that each is 7% (half of 14%). Let g be the growth rate in dividends, and solve for D:
$65 = D/(0.14-g)
0.14 - g = 0.07
g = 0.07
$65 = D/(0.07)
D = $4.55 (rounded to two decimal places)
Therefore, the current dividend per share is $4.25, which is closest to option B.

Suppose You Know That a Company's Stock Currently Sells for $65