Question

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $29.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Answer 1

D0 = $1.22

Step-by-step explanation:

Data provided in the question:

Required rate of return, r = 11.50% = 0.115

Selling price of the stock = $29.00

Expected growth rate = 7.00% = 0.07

Now,

Stock price =
`\frac{\textup{D1}}{\textup{(r-g)}}`

here,

D1 is the current dividend

thus,

$29.00 =
`\frac{\textup{D1}}{\textup{(0.115-0.07)}}`

or

D1 = $1.305

also,

D0 =
`\frac{\textup{D1}}{\textup{(1+g)}}`

or

D0 =
`\frac{\textup{1.305}}{\textup{(1+0.07)}}`

or

D0 = 1.219 ≈ $1.22