Kellner Motor Co.'s stock has a required rate of return of 12.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 6.00%.
What was the last dividend, D0?
The dividend is the periodic payment on the stock made by the company. The dividend return along with the growth rate in dividends is the total return required on the stock by the investors.
Answer and Explanation:
D0 = $1.53
Required Return = Dividend Yield + Growth Rate
- Required return = 12.50%
- Dividend Yield = ?
- Growth Rate = 6.00%
12.50% = Dividend Yield + 6.00%
Dividend Yield = 6.50%
Hence the dividend = $25.00 * 6.50% = $1.625
However this dividend is the dividend at the end of the year. Hence the value of the dividend at present = $1.625 / (1 + 6.00%)
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from Finance 101: Principles of FinanceChapter 16 / Lesson 1