Question

Goode Inc.'s stock has a required rate of return of 13.50%, and it sells for $15.00 per share. Goode's dividend is expected to grow at a constant rate of 7.50%. What was the last dividend, D0?

Answer 1

The last dividend = $0.84

Step-by-step explanation:

We know,

Current stock price,
`P_(0)` =
`D_(1)` ÷ (
`r_(s) - g`)

Given,

Market rate of return,
`r_(s)` = 13.50% = 0.135

Growth rate, g = 7.50% = 0.075

Expected dividend,
`D_(1)` =
`D_(0)` × (1 + g)

Thus we have to determine
`D_(0)` as it is the current year dividend or most recent dividend.

Current stock price,
`P_(0)` = $15

Putting the values into the above formula, we can get,

$15 = [
`D_(0)` × (1 + g)] ÷ [(
`r_(s) - g`)]

or, $15 = [
`D_(0)` × (1 + 0.075)] ÷ (0.135 - 0.075)

or, $15 = (
`D_(0)` × 1.075) ÷ 0.06

or, $15 =
`D_(0)` × 17.9167

or,
`D_(0)` = $15 ÷ 17.9167

Therefore, the last dividend
`D_(0)`, = $0.84