The common stock of Energy Saver pays an annual dividend that is expected to increase by 4 percent annually.The stock commands a market rate of return of 12 percent and sells for $58.25 a share.What is the expected amount of the next dividend to be paid?

Question

Quizplus · Accepted Answer

The expected dividend can be calculated using the dividend discount model for a stock with constant growth: D1 = P0 * (k - g), where D1 is the expected dividend, P0 is the current price, k is the required rate of return, and g is the growth rate. Substituting the given values: D1 = $58.25 * (0.12 - 0.04) = $58.25 * 0.08 = $4.66.

The Common Stock of Energy Saver Pays an Annual Dividend