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Moderate Growth Company paid a dividend last year of $2.05. The expected ROE for next year is 13%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 64%, what should the dividend in the coming year be?

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ahmedgodtrust

Answer:

g = r x b

g = 0.13 x  0.64

g = 0.832 = 8.32%

D1 = Do(1+g)

D1=$2.05(1+0.832)

D1 = $2.22

Explanation:

In this case, there is need to calculate the growth rate by considering the plowback ratio and return on equity. Thereafter, we will subject the last year dividend to growth in order to determine the dividend in the coming year.

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