Douglass Gardens pays an annual dividend that is expected to increase by 3.6 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $28.50 a share. What is the expected amount of the next dividend?

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Business

Catalina Holland

24 December, 08:14

Douglass Gardens pays an annual dividend that is expected to increase by 3.6 percent per year. The stock commands a market rate of return of 12.6 percent and sells for $28.50 a share. What is the expected amount of the next dividend?

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Answers (1)

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Darren Byrd · Answer 1

The expected next dividend is $2.565

Explanation:

The dividend for the Douglass is expected to grow at a constant rate forever. Thus, the constant growth model of DDM is used. The consatnt growth model gives the formula to calculate the price of the stock today. The formula is:

P0 = D1 / r - g

As the price and other variables are already known, we can plug in these values in the formula to calculate the next dividend.

28.5 = D1 / (0.126 - 0.036)

28.5 * (0.126 - 0.036) = D1

D1 = 28.5 * 0.09

D1 = $2.565