Zimmer's common stock sells for $37, and its dividends are expected to grow at a rate of 8 percent annually. What is the expected dividend (D₁) given that an investor requires a return of 16 percent? A) $2.74 B) $3.20 C) $5.92 D) $2.96

Question

Quizplus · Accepted Answer

Using the constant growth model, we can calculate the expected dividend as follows:

DS1 = DS0 * (1 + g)

Where DS0 is the current dividend, g is the expected growth rate, and DS1 is the expected dividend for next year.

We know that DS0 = $1.85 and g = 8%. We also know that the investor requires a return of 16%. This represents the cost of equity (k) for the company.

Using the dividend discount model, we can solve for k as follows:

k = (DS1 / P0) + g

Where P0 is the current stock price.

We rearrange this formula to solve for DS1:

DS1 = (k - g) * P0

Plugging in the values we know:

DS1 = (0.16 - 0.08) * $37 = $2.96

Therefore, the expected dividend for Zimmer given an investor requires a return of 16% is $2.96, as shown in option D.

Zimmer's Common Stock Sells for $37, and Its Dividends Are