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Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5 percent annually. The rate of return on this stock is 9 percent. What is the amount of the last dividend paid

Respuesta :

Shahzaibfaraz

Answer:

D0 = $0.8

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,

  • Do is the last dividend paid
  • D0 * (1+g) is dividend expected for the next period
  • g is the growth rate
  • r is the required rate of return  

Plugging in the values in the formula for P0, r and g, we can calculate the last dividend paid (D0) to be,

21 = D0 * (1+0.05)  /  (0.09 - 0.05)

21 =  D0 * (1+0.05)  / 0.04

21 * 0.04 =  D0 * (1+0.05)

0.84 / (1+0.05) = D0

D0 = $0.8

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