The current dividend yield on a stock A is 3.2%. The stock has a required rate of return of 9%. If the firm just paid a dividend of $1.65, what's the expected dividend for next year, assuming a constant growth rate?
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A. B. C. D.C
The dividend yield, defined as the expected dividend next period divided by current price, equals D1/Po, in standard notation. Using the Dividend Discount Model, this is equal to k - g. With k = 9%, we get 3.2% = 9% - g. Therefore, g = 5.8%. The expected dividend next year is then equal to 1.65 * 1.058 = $1.75.