Lesley Vegan Inc, producers of the finest dairy products, has common stock that sells for $54

Finance Dec 23, 2020

Lesley Vegan Inc, producers of the finest dairy products, has common stock that sells for $54. Dividends are expected to continue to grow at a rate of 10% annually. If investors in Lesley requires a 13 % rate of return, what is the current dividend?

Expert Solution

Stock Price = $54

Dividend Growth Rate = 10%

Required rate of return = 13%

Note: I have assumed Current Dividend as Dividend today.

Using Gordon Growth model, we can calculate the Expected Dividend.

Price of the Stock = Expected Dividend / (Required rate of return - Growth rate)

Putting values, 54 = Expected Dividend / (13% - 10%)

Expected Dividend = 54 * 3% = $1.62

Expected Dividend = Current Dividend * (1 + Growth rate)

Current Dividend = 1.62 / (1 + 10%) = 1.62 / 1.10

Hence, Current Dividend at Year 0 = $1.4727 or $1.47

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