Hi I have this question here that I am unsure as the dividend grow every 6months instead of annually. Question: A company just paid a dividend of $2.50 per share today. The company pays dividend twice a year. The dividend payment is expected to grow by 1.5% every six months. The company is traded now for $32.08 What is the annual rate of return required by the investors? A: 23.5% B: 20.8% C: 19.7% D: 10.2% E. 9.4%
k=d1/p0+g k=2.5*1.015/32.08+0.015=0.0941 => E, imho nothing special here
If you don’t mind my asking, where did you get this question with 5 answer choices? I don’t remember seeing any questions quite like this so far… that being said I don’t know the answer but E doesn’t seem right to me unless we are just supposed to ignore the fact that the dividend is paid twice a year. I thought that “d1” was the “dividend paid in year 1” and the dividend paid in year 1 is (2.5*1.015+ 2.5*1.015^2) = $5.11. I’m probably wrong because the answer I get is double of 9.4 and that choice isn’t on there… I would appreciate a more indepth explanation! thanks in advanc
tmjones2, if im understanding this problem correctly, it doesn’t matter that the dividend is paid twice a year… because the growth rate it mentions is every 6 months (twice a year). thus… u can sorta reword the entire question to say company pays $2.50 in divs this year… growing at 1.5% annually… price is 32.08. what is IRR. same answer 9.4%