We are given the following information:

• Current stock price ($P_0$) = $66.80
• Required return ($r$) = 10% or 0.10
• Total return is evenly split between capital gains yield and dividend yield.
• Constant dividend growth rate ($g$)

Step 1: Determine Growth Rate ($g$)

Since the total return is evenly divided between capital gains yield and dividend yield, we can express:

$\text{Capital Gains Yield} = \text{Dividend Yield} = \frac{r}{2}$

$g = \frac{0.10}{2} = 0.05 \text{ or } 5\%$

Step 2: Use the Gordon Growth Model

The Dividend Discount Model (Gordon Growth Model) states:

$P_0 = \frac{D_1}{r - g}$

Solving for $D_1$ (next year's dividend):

$D_1 = P_0 \times (r - g)$

$D_1 = 66.80 \times (0.10 - 0.05)$

$D_1 = 66.80 \times 0.05$

$D_1 = 3.34$

Step 3: Find Current Dividend $D_0$

Since dividends grow at a constant rate ($g$), the relationship between $D_0$ (current dividend) and $D_1$ (next year’s dividend) is:

$D_1 = D_0 \times (1 + g)$

$D_0 = \frac{D_1}{1 + g}$

$D_0 = \frac{3.34}{1.05}$

$D_0 = 3.18$

Final Answer:

$\mathbf{D_0 = 3.18}$

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Would you like a breakdown of any step?

Related Questions:

1. How would the dividend change if the required return increased to 12%?
2. What would happen to the stock price if the company increased its dividend growth rate?
3. If the company decided to pay a higher dividend instead of growing it, how would that affect investors?
4. How is the capital gains yield related to the price appreciation of the stock?
5. What assumptions does the Gordon Growth Model make, and how realistic are they?

Tip:

The Gordon Growth Model is most accurate when applied to companies with stable and predictable dividend growth. It is less reliable for companies with fluctuating earnings or dividends.