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Francis Inc.'s stock has a required rate of return of 8.0%, and it sells for $105 per share. The...

Question:

Francis Inc.'s stock has a required rate of return of 8.0%, and it sells for $105 per share. The dividend is expected to grow at a constant rate of 4.0% per year.

What is the expected year-end dividend?

a. $4.20

b. $4.04

c. $8.40

d. $8.00

e. $7.78

Year-End Dividend:

The year-end dividend represents the amount of dividend that a company will pay on its stock at the end of the year to its shareholders. The year-end dividend is denoted by "D1". It is used to compute the current price of the stock under the dividend growth model, where each year the dividend is assumed to grow at a fixed rate.

Answer and Explanation:


Correct answer: Option a) $4.20.

Explanation:

Francis Inc. has shared the following data:

  • Required return, r = 8%
  • Current stock price, P0 = $105
  • Dividend expected to grow at a constant rate, g = 4%

Computation:

The year-end dividend, D1, can be computed using the constant growth model:

  • P0 = D1 / (r - g)
  • D1 = $105 * (8% - 4%)
  • D1 = $4.20

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.5K

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