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?

$2.04

Explanation:

current stock price $70

required rate of return 6%

expected return = dividend yield + capital gains yield

6% = 3% + 3%

expected return = {[dividend x (1 + growth rate)] / price} + growth rate

6% = {[dividend x (1 + 3%)] / $70} + 3%

6% - 3% = [dividend x (1 + 3%)] / $70

3% x $70 = dividend x (1 + 3%)

$2.10 = dividend x 1.03

dividend = $2.10 / 1.03 = $2.04

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

a.   is the correct choice.

good luck. : )

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