Question

A stock is currently sold at $45.50 and is expected to grow at a constant rate of 9%. If you require a 15% rate of return, what is the current dividend on this stock?

a. $3.3
b. $2.7
c. $2.5
d. $3.0

Answer 1

Answer: c. $2.50

Step-by-step explanation:

Using the Gordon Growth Model;

Price = Next Dividend / (required return - growth rate)

45.50 = (Dividend * (1 + 9%)) / ( 15% - 9%)

45.50 * 6% = 1.09 * Dividend

2.73 = 1.09 * Dividend

Dividend = 2.73/1.09

= $2.50