Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost of capital of 8%. Praetorian's shares are currently trading at $84 per share. By comparing Praetorian with similar firms, an investor expects that its dividends will grow by up to 5% per year. What is the best next step that the investor should take regarding Praetorian's shares?

Question

Quizplus · Accepted Answer

The investor should revise her estimate of Praetorian's dividend growth to ensure that it aligns with her expectations. This is because if the actual dividend growth is less than her estimate, the stock may not be a good investment, whereas if the actual growth is higher, she may be missing out on potential gains. The other options of shorting or selling the shares or revising the equity cost of capital do not take into account the potential growth of the company's dividends.

Praetorian Industries Will Pay a Dividend of $2