Question

Braxton's Cleaning Company stock is selling for $34.50 per share based on a required return of 10.2 percent. What is the the next annual dividend if the growth rate in dividends is expected to be 4 percent indefinitely?

Answer 1

• $2.14

Step-by-step explanation:

The formula for the current price, P₀, of a stock that will pay annual dividends starting next year with D₁, with a constant annual growing rate, g, to perpetuity (indefinitely), for which is required a return of r percent, is:

`P_0=(D_1)/(r-g)`

Substitute and solve for D₁, the next annual dividend:

`\$34.50=(D_1)/(0.102-0.04)\\\\\\\D_1=\$34.50* 0.062 =\$2.14`