stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1? a. $2.20 b. $2.69 c. $2.96 d. $2.44 e. $3.25

Answer: D. $2.44

Explanation:

GIVEN the following;

Required rate of return (r) = 10.25% = 0.125

Price of share (P0) = $57.50

Growth rate = 6% = 0.06

Expected year end dividend (D1)

Price of stock (P0):

= Dividend (D1) : (rate of return - growrh rate)

$57.50 = (D1) : (0.1025 - 0.06)

$57.50 = D1 / 0.0425

D1 = $57.50 * 0.0475

D1 = $2.44375

Therefore, expected year-end dividend = $2.44

D; $2.44

Explanation:

In this question, we are asked to calculate expected year-end dividend D1 for a particular stock.

Mathematically,

Current stock price = Expected year end dividend / (Required return rate - growth rate)

Using the information in the question, we identify the following;

Current stock price = $57.50

Expected year end dividend = ?

Required return rate = 10.25% (0.1025)

Growth rate = 6% (0.06)

We can rewrite the equation as;

Expected year end dividend = Current stock price * (Required return rate - Growth rate)

= 57.5 * (0.1025 - 0.06) = 57.5 * 0.0425 = $2.44375

Hence, the expected year-end dividend D1 = $2.44