Question

Francis Inc.'s stock has a required rate of return of 10.25%, and it sells for $87.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1

Answer 1

D1 is $3.72

Step-by-step explanation:

The constant growth model of Dividend discount model approach (DDM) is used to calculate the fair price per share of a stock today when the dividends of a stock are growing at a constant rate forever. It values the stock based on the present value of the expected future dividends. The formula for price per share today is,

P0 = D1 / r - g

WHERE,

• D1 is dividend expected for the next period
• r is the required rate of return on the stock
• g is the growth rate in dividends

Plugging the values of the available variables, we calculate the value of D1 to be,

87.5 = D1 / (0.1025 - 0.06)

87.5 * 0.0425 = D1

D1 = $3.71875 rounded off to $3.72