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Hi Sir,
Came across this question in the kaplan study text. I was unable to understand the solution provided by the book, would appreciate if the solution is simplified. The question and the solution provided by the Book is below
Q) The shares of Bico have a current market price of $0.74 each ex-dividends. It is expected that the dividend in one year’s time will be $0.08 per share. The required rate of return from dividends on these shares is 16% per year. If the expected growth in future dividends is a constant annual percentage, what is the expected annual dividend growth?
A) Since D0(1+g) is the dividend after one year, we have:
74=8/(0.16-g)
74*(0.16-g)=8
0.16-g=8/74=0.1081
0.16-0.1081=g
g=0.052 or 5.2%Hi Sir,
Apologize if i have caused any inconvenience. I was able to solve it.
8 = D0(1+g)
so, applying the number for the Growth Model P0 = D0(1 + g)/(Re – g) would do solve the problem.
Hope that this is the right direction to do the question, I am open to know if there are any other methods that arrive at the same conclusion.
Thanks
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