If DO = $1.75, g (which is constant) = 3.6%, and PO = $31.00, what is the stock's expected total return for the coming year?
Dividend Growth Model:
The dividend growth model determines the current price of the stock by discounting the future dividends expected from the stock assumed to grow at a constant rate. The dividend growth model can also be used to determine the required return, provided the current price of the stock is given.
Answer and Explanation:
Correct answer: Option a) 9.45%.
As per the data:
- D0 = $1.75
- Constant growth rate, g = 3.6%
- P0 = $31
- Expected return, r =?
As per the dividend growth model:
- r = (D1 / P0) + g
- r = ($1.81 / $31) + 3.6%
- r = 9.45%
- D1 = D0 * (1 + g)
- D1 = $1.75 * (1 + 3.6%)
- D1 = $1.81
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from Financial Accounting: Help and ReviewChapter 1 / Lesson 31