Question

Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

Answer 1

To find the expected dividend next year, we can use the dividend discount model formula. By calculating the current dividend, we can then use the formula: Dividend = Current Dividend * (1 + Growth Rate). Plugging in the given values, the expected dividend next year is ($29 * 1.05) / 0.05.

Step-by-step explanation:

The expected dividend next year can be calculated using the formula: Dividend = Current Dividend * (1 + Growth Rate). In this case, the current dividend is not given, so we need to calculate it. We can use the formula for the dividend discount model: Current Dividend = Next Year's Dividend / (Required Return Rate - Growth Rate). Plugging in the values, we have: Current Dividend = Next Year's Dividend / (0.14 - 0.09). Simplifying this equation, we get Current Dividend = Next Year's Dividend / 0.05. Rearranging the equation, we get: Next Year's Dividend = Current Dividend * 0.05. We can now substitute this into the first formula: Dividend = Current Dividend * (1 + Growth Rate). Simplifying, we have Dividend = Current Dividend + (Current Dividend * Growth Rate). Plugging in the values, we get Dividend = Current Dividend + (Current Dividend * 0.09). Rearranging the equation, we get Dividend = Current Dividend * (1 + 0.09). We can now substitute in the value for Next Year's Dividend: Dividend = (Current Dividend * 0.05) * (1 + 0.09). Simplifying the equation, we get Dividend = Current Dividend * 1.05. Solving for the Current Dividend, we have Current Dividend = Dividend / 1.05. Plugging in the values, we have Current Dividend = (Next Year's Dividend * 0.05) / 1.05. Rearranging the equation, we get Next Year's Dividend = (Current Dividend * 1.05) / 0.05. Substituting the given values, we have: Next Year's Dividend = ($29 * 1.05) / 0.05.