Question

Cincy Machinery stock currently sells for $77 per share. The market requires a return of 14 percent while the company maintains a constant 6 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock (that is, this year's dividend)

Answer 1

$5.81

Step-by-step explanation:

according to the constant dividend growth model

price = d1 / (r - g)

d1 =do(1 + g) = next dividend to be paid

r = cost of equity

g = growth rate

(do x 1.06) / (0.14 - 0.06) = 77

(d0 x 1.06) / 0.08 = 77

Multiply both sides by 0.08

d0 x 1.06 = 6.16

divide both sides by 1.06

d0 = 5.81