Northwest Inc stock is selling for 4059 a share based on a 1

Northwest, Inc. stock is selling for $40.59 a share based on a 10 percent rate of return. What is the amount of the next annual dividend if the dividends are increasing by 2 percent annually?

Solution

According to the dividend growth model

P₀ = D₁/(R-g)

P₀ = $40.59, R = 10%, g = 2%

40.59 = D₁/(10% - 2%)

D₁ = 3.25

The answer is $3.25

Thanks.