Question

Weisbro and Sons common stock sells for $32 a share and pays an annual dividend that increases by 4.2 percent annually. The market rate of return on this stock is 9.9 percent. What is the amount of the last dividend paid by Weisbro and Sons?

a. $1.29
b. $1.71
c. $3.04
d. $1.75
e. $1.90

Answer 1

D0 = $1.7504 rounded off to $1.75

Option d is the correct answer

Step-by-step explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,

D0 is the last dividend paid

D0 * (1+g) is dividend expected for the next period /year

g is the growth rate

r is the required rate of return or cost of equity

Plugging in the values for P0, r and g in the formula, we can calculate the value of D0 to be,

32 = D0 * (1+0.042) / (0.099 - 0.042)

32 = D0 * (1.042) / 0.057

32 * 0.057 = D0 * (1.042)

1.824 = D0 * 1.042

1.824 / 1.042 = D0

D0 = $1.7504 rounded off to $1.75