Question

g If you require an annual rate of return of 12 percent, what should be the estimate of the amount of the annual dividend which you expect to receive at the end of Year 1? Assume that the expected return equals the required rate of return.

Answer 1

Answer:

Its very simple, the required return would be 12% of the amount invested today. And this can be explained by the use of DVM (Dividend valuation Model), which is as under:

For ordinary shares  r = (Dividend after one year / Share price now)

Dividend after one year =  Required return * Share Price Now

Assuming no growth in the dividends, we can say that the required return would be 12% of the amount invested now which is the share price of the ordinary shares.