Question

Roy's Welding Supplies common stock sells for $38 a share and pays an annual dividend that increases by 3 percent annually. The market rate of return on this stock is 8.20 percent. What is the amount of the last dividend paid?

Answer 1

The last dividend paid by Roy's Welding Supplies was $1.85, calculated using the constant growth dividend model with the given stock price, dividend growth rate, and required rate of return.

Step-by-step explanation:

The last dividend paid by Roy's Welding Supplies was $1.85.

To find the last dividend paid, known as D0, we use the formula for the constant growth model: P0 = D0*(1+g)/(r-g), where P0 is the current stock price, D0 is the last dividend paid, g is the growth rate of dividends, and r is the required rate of return or discount rate.

Here's a step by step explanation of the process:

1. Identify the known values from the question: P0=$38, g=3%, r=8.20%.
2. Rearrange the constant growth model formula to solve for D0: D0=P0*(r-g)/(1+g).
3. Plug in the known values: D0 = $38*(0.082-0.03)/(1+0.03).
4. Calculate: D0 = $38*0.052/1.03, resulting in D0≈$1.85.

Therefore, the last dividend paid was approximately $1.85.