FGCU inc has a dividend growth rate of 6 percent, This Difficult Finance Problem Solved
The problem goes as follows. FGCU Inc has a dividend growth rate of 6 percent, a market price of $16 a share, and a required return of 16 percent. What is the amount of the last Dividend this company paid?
A quick solution goes as follows, we will want to solve using the dividend yield equation:
Use the formula:
R = D1/P0 + G
Solve for D1
And then discount by the growth rate.
R = the required rate of return
P0 = the current market price of the stock
D1 = next years dividend
G. = the current growth rate of the stock.
.16 = D1/$16 + .06
Subtract .06 from both sides to get
.10 = D1/$16
Then multiply 16 by both sides to cancel out the fraction. This leaves you with a dividend yield of $1.60
But this is D1, next years dividend, we need to reduce this by one year of growth in order to get to D0, which is last years dividend paid. And so:
$1.60/1.06 = 1.509 or $1.51 as the last dividend paid.
Final Thoughts on FGCU Inc has a dividend growth rate of 6 percent
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