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posted by  tamm on 7/9/2009 5:12:32 PM  |  status: Live  |  Earned Karma: 25

Annual Dividend Amount

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Question Details:
Suppose you are willing to pay $30 today for a share of stock which you will expect to sell at the end of year one for $32. If you require and annual rate of return of 12%, what must be the amount of the annual dividend which you expect to receive at the end of year one?
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posted by devis on 7/9/2009 9:05:28 PM  |  status: Live
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Response Details:
Present Value of Current Share Value (PV) $30
Future Value of per Share (After 1 year) $32
Number of Periods

1 year
Annual rate of return 12%
Calculating Annual Dividend Payment :
(Using Ms-Excel "PMT" Function):
Annual Rate of Return (Rate) 12%
Number of Periods 1
Present Value of Share Value (PV) -$30
Future Value of per Share (FV) $32
Annual Dividend Payment (PMT) $1.60
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posted by Domokun on 7/11/2009 12:34:28 PM  |  status: Live
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Response Details:
A much easier way to calculate this without relying on Excel is as follows:
30 * 1.12 = 32 + Dividend
Dividend = 1.6
In words, today we have $30, at a 12% rate of return, it should grow to $33.60 in a year. Since you can only sell the stock for $32 in one year, then the difference 33.6 - 32 = 1.6 must be how much the dividend at the end of year one is worth.
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