Question

Braxton's Cleaning Company stock is selling for $34.75 per share based on a required returmn of 10.4 percent. What is the the next annual dividend if the growth rate in dividends is expected to be 3.9 percent indefinitely?

Answer 1

Answer: Po = D1/Ke + g

$34.75 = D1/0.104 + 0.039

$34.75 -0.039 = D1/0.104

$34.711 = D1/0.104

D1 = 34.711 x 0.104

D1 = $3.61

Explanation: In this question. there is need to apply the formula for determining the current market price of a common stock. The current market price of a common stock is a function of next dividend capitalised at the appropriate cost of equity plus growth rate. in addition, we need to make the next dividend the subject of the formula.