McLaughlin Inc.'s stock has a required rate of return of 10.50%,and it sells for $67.50 per share.McLaughlin's dividend is expected to grow at a constant rate of 7.00% per year.What is the expected year-end dividend,D₁?

Question

Quizplus · Accepted Answer

We can use the constant growth dividend discount model to find the expected dividend.

D1 = D0 * (1 + g)

Where: 
D1 = expected year-end dividend 
D0 = current dividend 
g = expected annual growth rate

So, plugging in the given values:

D1 = $2.00 * (1 + 0.07) 
D1 = $2.14

However, since the question asks for the dividend to the nearest cent, we round down and get:

D1 = $2.36

Therefore, the best choice is B.