Suppose you know a company's stock currently sells for $60 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 a capital gains yield and a dividend yield, is the company policy to always maintain a constant growth rate in its didende, what is the current dividend per share? 3722 Multiple Choice 375 $420 5427

Correct answer is option (D) $3.93

Since the returns on the share price and dividend is evenly divided, the growth rate of dividends will be 7% and rate of return on the stock will be 14%

Hence g =growth rate in dividends = 0.07

Re = required rate of return = 0.14

P0= present price =$60

D1 = dividend next year = ?

According to dividend growth model,

Re = D1/P0 + g

Hence, 0.14 = D1/60 + 0.07

Hence D1 = $4.2 which will be the dividend next year

Hence the dividend this year will be 4.2/1.07 = $3.93(approx) (Since dividend will grow by 7% every year).

Hence dividend this year will be $3.93.