Question

Braxton's Cleaning Company stock is selling for $ 31.00 per share based on a required return of 11.5 percent. What is the next annual dividend if the growth rate in dividends is expected to be 3.6 percent indefinitely?

Answer 1

Using the Gordon Growth Model, the next annual dividend for Braxton's Cleaning Company is calculated to be approximately $2.45 per share assuming the stock price is $31.00 with a required return of 11.5 percent and a dividend growth rate of 3.6 percent.

Step-by-step explanation:

To determine the next annual dividend for Braxton's Cleaning Company given that the stock is selling for $31.00 per share with a required return of 11.5 percent and an expected dividend growth rate of 3.6 percent indefinitely, we use the Gordon Growth Model (also known as the Dividend Discount Model). This model helps in finding the value of a stock based on a stream of future dividends that grow at a constant rate. The formula for the model is P = D1 / (r - g), where P is the current stock price, D1 is the expected dividend in the next year, r is the required return rate, and g is the dividend growth rate.

By rearranging the formula to solve for D1, we get D1 = P * (r - g). Plugging in the given values, we have:

D1 = $31.00 * (0.115 - 0.036)

Calculating this gives us:

D1 = $31.00 * 0.079

D1 = $2.449

So, the next annual dividend expected is approximately $2.45 per share. This method uses the dividend discount model to find the intrinsic value of the stock and, subsequently, the value of the future dividend payment.