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Homework answers / question archive / Handy Craft has just paid the dividends and the stock currently sells for $53 a share at a required return of 14 percent
Handy Craft has just paid the dividends and the stock currently sells for $53 a share at a required return of 14 percent. The price of the stock one year later is expected to be $56.18. The dividends are expected to grow at a constant rate per year, forever. What is the amount of the dividend Handy Craft just paid?
The current stock price, P0 = $53
The stock price one year from now = $56.18
First, let's find the growth rate in dividends (g)
g = The stock price one year from now/The current stock price - 1
g = 56.18/53 - 1
g = 1.06 - 1
g = 0.06
The current stock price is given by:
P0 = D0 * (1 + g)/(r - g)
Where,
P0 = 53
D0 = Dividend just paid
g = 0.06
r = required rate of return
r = 14% = 0.14
Using these values...
53 = D0 * (1 + 0.06)/(0.14 - 0.06)
53 = D0 * 1.06/0.08
53 = D0 * 13.25
D0 = 53/13.25
D0 = $4
The amount of dividend Handy Craft just paid is $4
