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In: Finance

Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that...

Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5.4 percent annually. The market rate of return on this stock is 9.4 percent. What is the amount of the last dividend paid by Weisbro and Sons?

  • $.74

  • $1.08

  • $1.87

  • $.80

  • $.89

Solutions

Expert Solution

Information provided:

Current stock price= $21

Dividend growth rate= 5.40%

Market rate of return= 9.40%

The question is solved using the dividend discount model.

Price of the stock today=Do(1 + g)/(r-g)

where:

Do= Last dividend payment

r= Market rate of return

g= Dividend growth rate

$21= $Do*(1 + 0.0540)/ 0.0940 – 0.0540

$21= $Do*1.0540/ 0.04

$0.84= $Do*1.0540

Do= $0.84/ 1.0540

     = $0.7970      $0.80.

Hence, the answer is option d.

In case of any query, kindly comment on the solution.

                                                                                                                                               

jeff jeffy answered 6 months ago
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