Question

GreatGrates anticipates that dividends will grow at the rate of 4.5% and has a required return of 11.8%. If the current stock price is $18.44. what is the dividend payment that investors can expect next year?

a.$0.83
b.$2.18
c.$1.35
d.$1.41

Answer 1

The expected dividend payment for next year based on the given parameters is $1.35, which makes option c the correct choice.

Step-by-step explanation:

The question asks us to calculate the expected dividend payment for next year using the Gordon Growth Model (also known as the Dividend Discount Model) for a company with a stock price of $18.44, expected dividend growth rate of 4.5%, and a required rate of return of 11.8%.

According to the model, the price of a stock is the present value of all future dividends, which can be calculated using the formula: Stock Price = Dividend Payment / (Required Rate of Return - Dividend Growth Rate). To find the expected dividend payment for the next year, we can rearrange the formula to solve for the Dividend Payment:

Dividend Payment = Stock Price * (Required Rate of Return - Dividend Growth Rate)

By substituting the given values into the formula, we have:

Dividend Payment = $18.44 * (0.118 - 0.045) = $18.44 * 0.073 = $1.34612

The closest answer to this calculation is $1.35, making option c the correct answer.