Roy's Welding common stock sells for $58.49 a share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?
A) $6.60
B) $5.86
C) $6.52
D) $6.98
E) $5.64

Question

Quizplus · Accepted Answer

The amount of the last dividend paid can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing dividend), which is P = D0 * (1 + g) / (r - g), where P is the price of the stock, D0 is the last dividend paid, g is the growth rate of the dividend, and r is the required rate of return (market rate of return). Rearranging the formula to solve for D0 gives D0 = P * (r - g) / (1 + g). Substituting the given values: D0 = $58.49 * (0.126 - 0.013) / (1 + 0.013) = $58.49 * 0.113 / 1.013 ≈ $6.52.

Roy's Welding Common Stock Sells for $58