Suppose you are willing to pay $30 today for a share of stock which you expect to sell at the end of one year for $32.If you require an annual rate of return of 12 percent,what must be the amount of the annual dividend which you expect to receive at the end of Year 1?
A) $2.25
B) $1.00
C) $1.60
D) $3.00
E) $1.95

Question

Quizplus · Accepted Answer

The dividend can be calculated using the Gordon Growth Model as follows:

Current Stock Price = (Dividend / (Required Rate of Return - Expected Growth Rate))

$30 = (Dividend / (0.12 - 0))

$30 = Dividend / 0.12

Dividend = $3.60 per year

Since we need to find the amount of annual dividend at the end of Year 1, we need to divide this by 2 to get:

Dividend = $1.80

Therefore, the closest choice is C: $1.60.

Suppose You Are Willing to Pay $30 Today for a Share