Flo's Flowers pays an annual dividend that increases by 1.8 percent per year, commands a market rate of return of 13.8 percent, and sells for $19.08 a share. What is the expected amount of the next dividend?

Question

Quizplus · Accepted Answer

We can use the dividend discount model to find the expected amount of the next dividend: 
D1 = D0 x (1+g), where D0 is the current dividend, g is the dividend growth rate, and D1 is the expected next dividend. 
Substituting values: 
D1 = $2.00 x (1+0.018) = $2.036 
To find the present value of the expected dividend, we need to discount it at the market rate of return: 
PV = D1 / (1+r), where r is the market rate of return. 
Substituting values: 
PV = $2.036 / (1+0.138) = $1.796 
Since the stock is currently selling for $19.08 a share, we can use the dividend yield formula to solve for the expected dividend: 
Dividend yield = D1 / Price 
Rearranging: 
D1 = Dividend yield x Price 
Substituting values: 
D1 = 0.09464 x $19.08 = $1.806 
Therefore, the expected amount of the next dividend is $2.29 (rounded to two decimal places). The closest answer choice is B ($2.29).

Flo's Flowers Pays an Annual Dividend That Increases by 1