Question

Zimmer's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent annually. What is the expected dividend (D1) if Zimmer is returning 16%?

Answer 1

The expected dividend (D1) when Zimmer is returning 16% is $39.96.

Step-by-step explanation:

To calculate the expected dividend (D1) when Zimmer is returning 16%, we can use the Gordon Growth Model formula. The formula is D1 = D0 * (1 + g), where D1 is the expected dividend, D0 is the current dividend, and g is the dividend growth rate.

Since Zimmer's dividend is expected to grow at a rate of 8 percent annually, we can plug in the values:

D0 = $37 (current dividend)

g = 8% = 0.08 (dividend growth rate)

So, D1 = $37 * (1 + 0.08) = $37 * 1.08 = $39.96

Therefore, the expected dividend (D1) when Zimmer is returning 16% is $39.96.