Question

Bechtel Machinery stock currently sells for $65 per share. The market requires a 14 percent return on the firm's stock. The company maintains a constant 8 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock?

Answer 1

Answer:

The most recent annual dividend paid per share on the stock is $3.61

Explanation:

The current price of the stock can be calculated using the constant growth model of DDM. The DDM values the stock based on the present value of the expected future dividends from the stock.

The formula for the price of the stock today under the constant growth model is,

P0 = D0 * (1+g) / (r - g)

Where,

• D0 is the most recent dividend paid

• D0 * (1+g) is the dividend expected to be paid next period

• r is the required rate of return

• g is the growth rate in dividends

To calculate the most recent annual dividend per share paid (D0), we use this formula for constant growth model and plug in the available values of all other variables.

65 = D0 * (1+0.08) / (0.14 - 0.08)

65 * (0.06) = D0 * (1.08)

3.9 / 1.08 = D0

D0 = $3.61