McLaughlin Inc.'s stock has a required rate of return of 10.50%, and it sells for $67.50 per share. McLaughlin's dividend is expected to grow at a constant rate of 7.00% per year. What is the expected year-end dividend, D1?

Question

Quizplus · Accepted Answer

Using the Gordon Growth Model:

D1 = D0 x (1 + g)

Where,

D0 = Current dividend = $2.00 
g = Growth rate = 7% 
r = Required rate of return = 10.50%

D1 = $2.00 x (1 + 0.07) = $2.14

However, we need to consider that the stock currently sells for $67.50 per share. Therefore, we need to adjust our calculation to find the expected year-end dividend per share:

Expected year-end dividend per share = D1 / Stock Price

Expected year-end dividend per share = $2.14 / $67.50 = $0.0318

Therefore, the expected year-end dividend per share is $0.0318 or $2.36.

The best choice is B.