Question

Weisbro and Sons common stock sells for $40 a share and pays an annual dividend that increases by 5.2 percent annually. The market rate of return on this stock is 9.2 percent. What is the amount of the last dividend paid by Weisbro and Sons

Answer 1

$1.52

Step-by-step explanation:

We know,

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

Given,

Market rate of return,
`r_(s)` = 9.2% = 0.092

Growth rate, g = 5.2% = 0.052

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

Current stock price,
`P_(0)` = $40

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

$40 = [
`D_(0)` × (1 + g)] ÷ [(
`r_(s) - g`)]

or, $40 = [
`D_(0)` × (1 + 0.052)] ÷ (0.092 - 0.052)

or, $40 = (
`D_(0)` × 1.052) ÷ 0.04

or, $40 =
`D_(0)` × 26.3

or,
`D_(0)` = $40 ÷ 26.3

Therefore, last dividend paid by the company,
`D_(0)` = $1.52