#1. Investors receive a total return of 15 percent on the common stock of Nickel

Question

#1. Investors receive a total return of 15 percent on the common stock of Nickel and Dime, Inc. The stock is selling for $28.25 a share. What is the constant growth rate (g) of the firm if the company plans to pay an annual dividend of $1.70 a share next year?

#2. Northwest, Inc. stock is selling for $40.59 a share based on a 10 percent rate of return. Calculate the amount of the next annual dividend (i.e. D1) if the dividends are increasing by 5 percent annually.

Investors receive a total return of 15 percent on the common stock of Nickel and Dime, Inc. The stock is selling for $28.25 a share. What is the constant growth rate (g) of the firm if the company plans to pay an annual dividend of $1.70 a share next year? Northwest, Inc. stock is selling for $40.59 a share based on a 10 percent rate of return. Calculate the amount of the next annual dividend (i.e. D1) if the dividends are increasing by 5 percent annually.

Explanation / Answer

1)

Growth of a stock can be computed using the following formula

Current price=D1/(Re-g)

where D1=dividend after 1 year

Re=Rate of return

g=growth rate

Now 28.25=1.70/(0.15-g)

Or 0.15-g=1.70/28.25

OR g=8.98%(approx)

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