Bechtel Machinery stock currently sells for $65 per share.The market requires a 14 percent return on the firm's stock.The company maintains a constant 8 percent growth rate in dividends.What was the most recent annual dividend per share paid on this stock?
A)$3.00
B)$3.61
C)$3.67
D)$3.75
E)$3.91

Question

Quizplus · Accepted Answer

The most recent annual dividend per share paid on this stock can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a perpetuity), which is given by $ P_0 = \frac{D_0 \times (1 + g)}{r - g} $, where $P_0$ is the current stock price, $D_0$ is the most recent dividend paid, $g$ is the growth rate of dividends, and $r$ is the required rate of return. Rearranging the formula to solve for $D_0$, we get $D_0 = \frac{P_0 \times (r - g)}{1 + g}$. Substituting the given values ($P_0 = $65$, $r = 14\%$, $g = 8\%$), we find $D_0 = \frac{$65 \times (0.14 - 0.08)}{1 + 0.08} = \frac{$65 \times 0.06}{1.08} = \frac{$3.9}{1.08} = $3.61$.

Bechtel Machinery Stock Currently Sells for $65 Per Share