question archive The dividend-growth model, V Do(1+) -9 suggests that an increase in the dividend growth rate will increase the value of a stock
The dividend-growth model, V Do(1+) -9 suggests that an increase in the dividend growth rate will increase the value of a stock
Subject:FinancePrice:2.86 Bought10
The dividend-growth model, V Do(1+) -9 suggests that an increase in the dividend growth rate will increase the value of a stock. However, an increase in the growth may require an increase in retained earnings and a reduction in the current dividend. Thus, management may be faced with a dilemma: current dividends venus future growth. As of now, investors' required return is 11 percent. The current dividend is $0.9 a share and is expected to grow annually by 6 percent, so the current market price of the stock is $19.08. Management may make an investment that wil increase the firm's growth rate to 10 percent, but the investment will require an increase in retained camings, so the firm's dividend must be cut to $0.8 a share. Should management make the investment and reduce the dividend Round your answer to the nearest cent. The value of the stock Select to $ so the management Select make the investment and decrease the dividend. Grade It Now Save & Continue Continue without saving
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Current dividend "D" = $ 0.9
Growth rate "g" = 6%
Required return "R" = 11%
Current share price = (D × (1 + g) ÷ (R - g))
Current share price =(0.9 × (1 + 6%) ÷ (11% - 6%))
Current share price = $ 19.08
If management want to increase growth rate to 10% dividend will decrease to $ 0.8
Reduced dividend "D" = $ 0.8
Increased growth rate "g" = 10%
Required rate of return "R" = 11%
Stock price = (D × (1 + g) ÷ (R - g))
Stock price = (0.8 × (1 + 10%) ÷ (11% - 6%))
Stock price = $ 88
The value of stock increase to $ 88 so management should make the investment and decrease the dividend
