Question

The stock in Up-Towne Movers is selling for $45.20 per share. Investors have a required return of 9.9 percent and expect the dividends to grow at 3.9 percent indefinitely. What was the dividend the company just paid?

Answer 1

Answer: $2.61

Explanation:

We can use the Gordon Growth Model here of which the formula is,

P = D1 / r – g.

Where

P is the stock price

D1 = the annual expected dividend of the next year.

r = rate of return.

g = the expected dividend growth rate (assumed to be constant)

Making D1 the subject of the formula to find the next dividend will help us solve for the recent Dividend.

D1 = P (r-g)

= 45.20 (0.099 - 0.039)

= $2.712

$2.712 is the next dividend.

To calculate the most recent Dividend we can use the growth rate in the following manner,

D1 = D0(1 + g)

D0 = D1/(1+g)

D0 = 2.712 / 1.039

D0 = $2.61

The dividend the company just paid is $2.61

Answer 2

Answer:

The dividend the company just paid is $2.61

Explanation:

Since the dividend is expected to grow indefinitely, we can proceed by employing the Gordon Growth Model formula as follows:

P = D1/(r – g) ……………………………………… (1)

Where;

P = current share price = $45.20

D1 = next year dividend = ?

r = required return = 9.9%, or 0.099

g = dividend constant growth forever = 3.9%, or 0.039

Substituting the values into equation and solve for D1, we have:

$45.20 = D1/(0.099 – 0.039)

D1 = 45.20 × (0.099 – 0.039) = $2.712

Since D1 = D0 × (1 + g), we can solve for D0 as follows:

$2.712 = D0 × (1 + 0.039)

D0 = 2.712 ÷ 1.039

D0 = $2.61

Therefore, the dividend the company just paid is $2.61.