The ordinary equity of Energizer's pays an annual dividend that is expected to increase by 10% annually.The equity commands a market rate of return of 12% and sells for €60.50 a share.What is the expected amount of the next dividend to be paid on Energizer's ordinary equity?

Question

Quizplus · Accepted Answer

The expected dividend can be calculated using the Gordon Growth Model (Dividend Discount Model for a growing dividend), which is P = D0*(1+g) / (r - g), where P is the current price, D0 is the current dividend, g is the growth rate, and r is the required rate of return. Rearranging the formula to solve for D0 gives D0 = P*(r - g) / (1+g). Given P = €60.50, g = 10% or 0.10, and r = 12% or 0.12, we find D0. However, the question asks for the next dividend, which is D1 = D0*(1+g). Substituting the values and solving for D0 and then D1, we find D1 = €1.21.

The Ordinary Equity of Energizer's Pays an Annual Dividend That