High Tech Chip Company paid a dividend last year of $2.50.The expected ROE for next year is 12.5%.An appropriate required return on the stock is 11%.If the firm has a plowback ratio of 60%,the dividend in the coming year should be
A)$1.00
B)$2.50
C)$2.69
D)$2.81
E)none of the above

Question

Quizplus · Accepted Answer

The dividend growth model is used here. The growth rate (g) is ROE * plowback ratio = 12.5% * 60% = 7.5%. The dividend in the coming year is last year's dividend * (1 + g) = $2.50 * 1.075 = $2.6875, approximately $2.69.

High Tech Chip Company Paid a Dividend Last Year of $2.50.The