Question

Mannix Corporation stock currently sells for $57 per share. The market requires a return of 11 percent on the firm’s stock. If the company maintains a constant 3.75 percent growth rate in dividends, what was the most recent dividend per share paid on the stock?

Answer 1

As per Dividend Discount Model, the Price of the stock is calculated by using the following formula

Share Price (P0) = D0(1 + g) / (Ke – g)

Where, Current selling price of the share (P0) = $57.00 per share

Required Rate of Return (Ke) = 11%

Dividend Growth Rate (g) = 3.75%

Therefore, Share Price (P0) = D0(1 + g) / (Ke – g)

$57.00 = D0(1 + 0.0375) / (0.11 – 0.0375)

$57.00 = [D0 x 1.0375] / 0.0725

$57.00 x 0.0725 = D0 x 1.0375

$4.1325 = D0 x 1.0375

D0 = $4.1325 / 1.0375

D0 = $3.98 per share

“Therefore, the most recent dividend per share paid on the stock = $3.98”