Zimmer's common stock sells for $37 and its dividend is expected to grow at a rate of 8 percent annually. What is the expected dividend (D₁)if Zimmer is returning 16%?

Question

Quizplus · Accepted Answer

To solve this problem, we can use the dividend growth model:

P0 = D1 / (r - g)

where P0 is the current stock price, D1 is the expected next dividend, r is the required rate of return, and g is the expected growth rate of the dividend.

We know that P0 = $37, g = 8%, and r = 16%.

Solving for D1, we get:

$37 = D1 / (0.16 - 0.08)
$37 = D1 / 0.08
D1 = $2.96

Therefore, the expected dividend is $2.96. The correct answer is D.

Zimmer's Common Stock Sells for $37 and Its Dividend Is