Weisbro and Sons common stock sells for $25 a share and pays an annual dividend

Question

Weisbro and Sons common stock sells for $25 a share and pays an annual dividend that increases by 3.3 percent annually. The market rate of return on this stock is 11.00 percent. What is the amount of the last dividend paid by Weisbro and Sons?

$1.99

$1.86

$2.66

$0.80

$1.83

Weisbro and Sons common stock sells for $25 a share and pays an annual dividend that increases by 3.3 percent annually. The market rate of return on this stock is 11.00 percent. What is the amount of the last dividend paid by Weisbro and Sons?

Explanation / Answer

Let P=stock's current Price=25

g=dividend growth rate per year=3.3%

D0= last dividend paid

let r=expected rate of return=11%

According to constant growth  dividend model,

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

=>D0=P*(r-g)/(1+g)=25*(.11-.033)/(1+.033)=1.86

Thus  last dividend paid by Weisbro and Sons is $1.86.

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