Question

17. Wislow Brothers common stock sells for $30 a share and pays an annual dividend that increases by 4 percent annually forever. The market rate of return on this stock is 10 percent. What is the closest value to the amount of the dividend in two years

Answer 1

$1.95

Step-by-step explanation:

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

30 = d / 0.1 - 0.04

d = 30 x 0.06 = 1.8

growth in 2 years = 1.8 x (1.04^2) = $1.95