The common stock of Rose's Flowers pays an annual dividend that is expected to increase by 1.5% per year. The stock commands a market rate of return of 10.7% and sells for $15.90 a share.
What is the expected amount of the next dividend?
Required Rate of Return:
The required rate of return is the minimum return that an investor expects on his investment in the equity of the firm. To compute the required return we can use the dividend growth model or the capital asset pricing model. The required return is also used to value an unlevered company's market value and for the stock valuation under the dividend growth model, the future dividends are discounted at required return less the constant growth rate.
Answer and Explanation:
The expected amount of the next dividend of Rose's Flowers' stock is $1.46.
As per the data shared by Rose's Flowers:
- Constant growth rate = 1.50%
- Required return, Ke = 10.70%
- Current stock price, P0 = $15.90
As per the dividend growth model,
- P0 = D1 / (Ke - g)
- D1 = $15.90 * (10.70% - 1.50%)
- D1 = $1.46
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from Financial Accounting: Help and ReviewChapter 1 / Lesson 29