Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share.The dividend is expected to grow at a constant rate of 6.00% per year.What is the expected year-end dividend, D₁? A) $2.20 B) $2.44 C) $2.69 D) $2.96 E) $3.25

Question

Quizplus · Accepted Answer

To calculate the expected year-end dividend (D1), we can use the Gordon growth model:
D1 = D0 * (1 + g)
where:
D0 = the current dividend per share
g = the expected constant growth rate
We know that D0 = DS0 = current dividend per share = $2.20 (given in the question). And g = 6.00% = 0.06 (given in the question).
So,
D1 = $2.20 * (1 + 0.06) = $2.20 * 1.06 = $2.332
However, we need to adjust this value for the required rate of return (k). This adjustment is done by dividing the expected dividend by the difference between k and g:
D1 = [D0 * (1 + g)] / (k - g)
D1 = [$2.20 * (1 + 0.06)] / (0.1025 - 0.06) = $2.44
Therefore, the expected year-end dividend is $2.44. Hence, the best choice is B.

Hirshfeld Corporation's Stock Has a Required Rate of Return of 10.25