Question

The stock in Up-Towne Movers is selling for $46.20 per share. Investors have a required teturn of 11.4 percent and expect the dividends to grow at 4.4 percent indefinitely. What was the dividend the company Just pald? Multiple Choice

a)$3.60
b)$2.78
c)$3.09
d)$3.03
e)$3.23

Answer 1

The dividend Up-Towne Movers just paid was approximately $3.09, calculated using the Gordon Growth Model with the given stock price, dividend growth rate, and required rate of return.

Step-by-step explanation:

To calculate the dividend Up-Towne Movers just paid, we need to use the Gordon Growth Model (also known as the Dividend Discount Model) which assumes that dividends will grow at a constant rate indefinitely. The formula for calculating the current stock price based on the dividend is P0 = D0 * (1 + g) / (r - g), where P0 is the current stock price, D0 is the dividend just paid, g is the growth rate of the dividends, and r is the required rate of return.

Using the given figures: P0 = $46.20, g = 4.4%, and r = 11.4%, we can rearrange the formula to solve for D0: D0 = P0 * (r - g) / (1 + g).

Thus, D0 = $46.20 * (11.4% - 4.4%) / (1 + 4.4%) = $46.20 * 0.07 / 1.044, which on calculation gives us D0 ≈ $3.09.