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7 September, 14:36

Suppose you know a company's stock currently sells for $70 per share and the required return on the stock is 6 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. What is the current dividend if it's the company's policy to always maintain a constant growth rate in its dividends?

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  1. 7 September, 15:03
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    Future dividend = $2.0388~ $2.04

    Explanation:

    The return on the shares is given as 0.06 of $70. And the returns are equally shared between capital gains and dividend.

    Dividend = 0.06 : 2 = 0.03

    Dividend = 0.03 * 70 = $2.10

    Using the formula that related the present year dividend with next year dividend

    Present dividend = Future dividend (1 + rate)

    2.1 = Future dividend (1+0.03)

    Future dividend = 2.1 : 1.03

    Future dividend = $2.0388
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