Question

Morton Industries' common stock sells for $54. Dividends are expected to continue to grow at a rate of 8% annually. If Morton returns 13%, what was its most recent dividend?

Answer 1

The most recent dividend for Morton Industries can be calculated using the dividend growth rate formula and the dividend discount model. Based on the given information, the most recent dividend is $2.70.

Step-by-step explanation:

The most recent dividend for Morton Industries can be calculated using the dividend growth rate formula. The formula is Div1 = Div0 * (1 + g), where Div1 is the most recent dividend, Div0 is the previous dividend, and g is the dividend growth rate. In this case, we know that the current stock price is $54 and the required rate of return is 13%. We also know that the dividend growth rate is 8%.

Let's assume the most recent dividend is Div1. We can calculate Div0 using the formula Div0 = Div1 / (1 + g). Substituting the given values, we find that Div0 = Div1 / (1 + 0.08).

Next, we can use the dividend discount model (DDM) to find Div1. The DDM formula is Po = Div1 / (r - g), where Po is the price of a share of stock, Div1 is the most recent dividend, r is the required rate of return, and g is the dividend growth rate.

Substituting the given values, we have $54 = Div1 / (0.13 - 0.08). Rearranging the formula, we find that Div1 = $54 * (0.13 - 0.08). Therefore, the most recent dividend for Morton Industries is $2.70.