Question

A company's current stock price is $44 per share, while investors' required return is 9.00%. If the dividend for the year just ended is $3.00 per share, how much is the dividend in two years from today assuming a constant annual dividend growth? $2.89 $2.97 $3.05 $3.12 $3.20

Answer 1

The dividend in 2 years is computed as shown below:

= Current dividend (1 + growth rate)²

growth rate is computed as follows:

current price = current dividend (1 + g) / (required rate of return - g)

$ 44 = $ 3 x (1 + g) / (0.09 - g)

$ 3.96 - 44 g = $ 3 + 3 g

$ 0.96 = 47 g

g = 0.020425532

So, the dividend will be as follows:

= $ 3 x (1 + 0.020425532)²

= $ 3.12 Approximately

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