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Teder Corp. stock currently sells for $64 per share. The market requires a 10 percent return on...

Question:

Teder Corp. stock currently sells for $64 per share. The market requires a 10 percent return on the firm's stock. If the company maintains a constant 4.5 percent growth rate in dividends, what was the most recent dividend per share paid on the stock?

Dividends

The dividend in finance is a reward received by the shareholder from the company. A major source of the dividend is the recent net income of the company and the dividend can be distributed in the form of cash, stock, property, etc.

Answer and Explanation:

{eq}P~=~\frac{D_1}{r~-~g}\\ Where:\\ P~=~stock~price\\ D_1~=~next~year's~dividend\\ r~=~rate~of~return\\ g~=~growth~rate {/eq}

Since the value of the dividend for this year is missing, we will calculate using the available information:

{eq}P~=~\frac{D_1}{0.10~-~0.045} {/eq}


{eq}64~=~\frac{D_1}{0.055} {/eq}

The dividend for the next year is $3.52. However; for us to determine the value of the dividend this year:

{eq}D_0~=~\frac{D_1}{1~+~g} {/eq}


{eq}D_0~=~\frac{3.52}{1~+~0.045} {/eq}


{eq}D_0~=~\frac{3.52}{1.045} {/eq}

The recent value of the dividend paid on the stock is $3.37


Learn more about this topic:

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Dividend: Definition & Overview

from GMAT Prep: Tutoring Solution

Chapter 1 / Lesson 8
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