Question

The common stock of Energy Saver pays an annual dividend that is expected to increase by 4 percent annually. The stock commands a market rate of return of 12 percent and sells for $58.25 a share. What is the expected amount of the next dividend to be paid

Answer 1

Answer:

D1 = 4.66

Explanation:

The constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D1 / (r - g)

Where,

• D1 is dividend expected for the next period

• g is the growth rate

• r is the required rate of return  

Plugging in the values for P0, g and r we can calculate the D1 to be,

58.25 = D1  /  (0.12 - 0.04)

58.25 = D1 / 0.08

58.25 * 0.08 = D1

D1 = 4.66