Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year?

Question

Quizplus · Accepted Answer

The expected dividend next year can be calculated as follows:
Dividend next year = Dividend this year*(1+growth rate)
Dividend this year = Current stock price*(required return - growth rate)
Dividend this year = $29*(0.14 - 0.09) = $1.45
Dividend next year = $1.45*(1+0.09) = $1.58 (rounded to the nearest cent)
Therefore, the closest option is C) $1.45.

Pace Enterprises' Common Stock Sells for $29, and Its Dividends