Question

Secolo Corporation stock currently sells for $50 per share. The market requires a return of 8 percent on the firm's stock. If the company maintains a constant 2 percent growth rate in dividends, what was the most recent dividend per share paid on the stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Dividend paid per share

Answer 1

Solution :

As per the Gordon growth Model, price of a share is calculated using the following formula:

P = D₀ * [ ( 1 + g ) ] / ( k_e – g )

Where

P = Price of the share;      D₀ = Dividend paid in Year 0 i.e., Recent dividend paid ;

g = growth rate ;            k_e = Required Rate of return of the market

As per the information given in the question we have ;

P = $ 50   ;    g = 2 % = 0.02 ;    k_e = 8 % = 0.08 ;   D₀ = To find

Applying the above values in the formula we have

$ 50 = [ D₀ * ( 1 + 0.02 ) ] / ( 0.08 – 0.02)

$ 50 = [ D₀ * ( 1.02 ) ] / ( 0.08 – 0.02)

$ 50 = [ D₀ * ( 1.02 ) ] / 0.06

$ 50 * 0.06 = D₀ * 1.02

$ 3 / 1.02 = D₀

D₀ = $ 3 /1.02 = $ 2.9412

D₀ = $ 2.94 ( when rounded off to two decimal places )

Thus the Dividend per share = $ 2.94