Question

D - The following calculations show that "A's expected dividend is 0.75 and B's expected dividend is 1.20" is correct. The others are all wrong. Calculate the expected dividend for A and B given the following information:

A:
Price: 2540
Expected growth: 7
Expected return: 10

B:
Price:2540
Expected growth: 7
Expected return: 10

A = P0 = D1 / (r - g) = D1 = P0(r) - P0(g) = ?

B = P0 = D1 / (r - g) = D1 = P0(r) - P0(g) = ?

Answer 1

The expected dividend for both stocks A and B using the constant growth dividend discount model with the given price of 2540, expected growth of 7%, and expected return of 10% is 76.2, not 0.75 or 1.20 as claimed.

Step-by-step explanation:

To calculate the expected dividend for stocks A and B given their respective prices, expected growth rates, and expected return rates, we use the dividend discount model (DDM). The formula for the expected dividend (D1) is derived from the constant growth DDM: P0 = D1 / (r - g) where P0 is the current stock price, r is the expected return rate, and g is the expected growth rate of the dividend. Rearranging the formula to solve for D1, we get: D1 = P0 * (r - g).

For stock A and B, P0 is 2540, r is 10% (or 0.10), and g is 7% (or 0.07). Thus, the expected dividend for both A and B is: D1 = 2540 * (0.10 - 0.07) = 2540 * 0.03 = 76.2. Therefore, the claim that "A's expected dividend is 0.75 and B's expected dividend is 1.20" is incorrect; the correct expected dividend for both A and B is 76.2. It should be noted that this formula assumes a constant growth rate and that expected dividends and returns are theoretical and may differ in real-world scenarios.