HiGlo's common stock sells for $23.50 and its earnings are expected to grow at a rate of 12% annually.What is the current dividend (D₀) for an investor who requires a 15% return?
A)$0.71
B)$0.63
C)$0.34
D)$0.31

Question

Quizplus · Accepted Answer

To find the current dividend (D₀), we use the Gordon Growth Model: P₀ = D₁ / (r - g). Here, P₀ = $23.50, r = 15% (0.15), and g = 12% (0.12). First, calculate D₁: D₁ = D₀ * (1 + g). Rearrange the formula to find D₀: D₀ = P₀ * (r - g) / (1 + g). Plug in the values: D₀ = $23.50 * (0.15 - 0.12) / (1 + 0.12) = $0.63.

HiGlo's Common Stock Sells for $23