Factory Stores pays annual dividends and increases those dividends by 2 percent each year.The stock is currently valued at $12 a share and has a required return of 16 percent.You own 400 shares of this stock.What is the total amount of dividend income you should expect to receive next year?
A)$646
B)$659
C)$672
D)$685
E)$699

Question

Quizplus · Accepted Answer

The dividend next year can be calculated using the formula for the dividend growth model: D1 = D0 * (1 + g). First, find the current dividend (D0) using the formula: Price = D0 * (1 + g) / (r - g). Solving for D0 gives $12 = D0 * 1.02 / 0.14, which results in D0 = $1.65. The dividend next year (D1) is $1.65 * 1.02 = $1.683. For 400 shares, the total dividend income is 400 * $1.683 = $673.20, which rounds to $672.

Factory Stores Pays Annual Dividends and Increases Those Dividends by 2