Question: Using the dividend growth model, a stock's total return (R) can be rearranged into two components. + g The first component, D1 / P0 ,

Using the dividend growth model, a stock's total return (R) can be rearranged into two components.

+ g

The first component, D1 / P0, is called a dividend yield and is calculated as the expected cash dividend by the current price (this is conceptually similar to a bond's current yield). The second component is the growth rate, g. This growth rate can be interpreted as the capital gains yieldthe rate at which the value of the investment grows.

Suppose you know that a company's stock currently sells for $100 per share and the required return on the stock is 12.5 percent. You also know that the total return on the stock is evenly divided between a 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?

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