Question

Goode Inc.'s stock has a required rate of return of 13.50%, and it sells for $15.00 per share. Goode's dividend is expected to grow at a constant rate of 7.50%. What was the last dividend, D0?

Answer 1

Answer:

The last dividend = $0.84

Explanation:

We know,

Current stock price, $P_{0}$ = $D_{1}$ ÷ ($r_{s} - g$)

Given,

Market rate of return, $r_{s}$ = 13.50% = 0.135

Growth rate, g = 7.50% = 0.075

Expected dividend, $D_{1}$ = $D_{0}$ × (1 + g)

Thus we have to determine $D_{0}$ as it is the current year dividend or most recent dividend.

Current stock price, $P_{0}$ = $15

Putting the values into the above formula, we can get,

$15 = [$D_{0}$ × (1 + g)] ÷ [($r_{s} - g$)]

or, $15 = [$D_{0}$ × (1 + 0.075)] ÷ (0.135 - 0.075)

or, $15 = ($D_{0}$ × 1.075) ÷ 0.06

or, $15 = $D_{0}$ × 17.9167

or, $D_{0}$ = $15 ÷ 17.9167

Therefore, the last dividend $D_{0}$,  = $0.84