A stock sells for $14.85 a share and has a required return of 14 percent. Dividends are paid annually and increase at a constant 3 percent per year. What is the amount of the last dividend paid?

Question

Quizplus · Accepted Answer

Using the constant growth dividend discount model, we can calculate the last dividend paid as follows:
Last dividend = (Next dividend ÷ (Required return – Dividend growth rate)) – Dividend growth rate
We know that the stock has a required return of 14 percent and a dividend growth rate of 3 percent per year. Therefore, we can calculate the next dividend as follows:
Next dividend = Current dividend × (1 + Dividend growth rate)
Next dividend = Current dividend × (1 + 0.03)
Next dividend = Current dividend × 1.03
Next dividend = 1.50 × 1.03
Next dividend = $1.545
Now we can use the formula above to calculate the last dividend:
Last dividend = ($1.545 ÷ (0.14 – 0.03)) – 0.03
Last dividend = ($1.545 ÷ 0.11) – 0.03
Last dividend = $14.05 – 0.03
Last dividend = $1.59 (rounded to two decimal places)
Therefore, the answer is C) $1.59.

A Stock Sells for $14