Question

Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $29.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

Answer 1

Answer:

D0 = $1.22

Explanation:

Data provided in the question:

Required rate of return, r = 11.50% = 0.115

Selling price of the stock = $29.00

Expected growth rate = 7.00% = 0.07

Now,

Stock price = $\frac{\textup{D1}}{\textup{(r-g)}}$

here,

D1  is the current dividend

thus,

$29.00 = $\frac{\textup{D1}}{\textup{(0.115-0.07)}}$

or

D1 = $1.305

also,

D0 = $\frac{\textup{D1}}{\textup{(1+g)}}$

or

D0 = $\frac{\textup{1.305}}{\textup{(1+0.07)}}$

or

D0 = 1.219 ≈ $1.22