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jeni889 · Nov 4, 2009, 06:12 PM

Northwest inc stock is selling for r$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?

dfitzhughjr · Nov 4, 2009, 07:18 PM

There are stock advisors on this subject, but from my own experience you are missing one critical element to the question. What are the dividends paying annually? If that is the rate of return then your equation would seem to be 4.059 multiplied by 1.02 or $4.14. Just a guess.

walt17 · Nov 5, 2009, 10:30 AM

Originally Posted by jeni889

northwest inc stock is selling fo r$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??

Terminology seems wrong, but if by "rate of return" you mean "dividend yield"...
Current dividend = $4.059 (share price ($40.59) * yield (0.1))
Next annual dividend = $4.14 (Current dividend ($4.059)* expected increase (1.02))

ArcSine · Nov 5, 2009, 02:06 PM

Jeni, you can use the so-called 'constant growth model' to solve for d...

$P \ = \ \LARGE\frac{d}{r \ - \ g}$

... where P, d, r, and g, are, respectively, the current stock price; the next dividend (to be paid one year from today); the rate of return; and the dividend stream's growth rate.

Your problem gives you P, r, and g... use the formula to solve for d.