Factory Stores pays annual dividends and increases those dividends by 2 percent each year. The stock is currently valued at $12 a share and has a required return of 16 percent. You own 400 shares of this stock. What is the total amount of dividend income you should expect to receive next year?

$672

Explanation:

Given:

Growth rate = 2% = 2/100 = 0.02

Current value of stock = $12

Required return = 16% = 16/100 = 0.16

Total number of stock = 400 shares

Computation of Dividend income per stock:

Current value of stock = Dividend income / (Required return - Growth rate)

$12 = Dividend income / (0.16 - 0.02)

$12 = Dividend income / (0.14)

Dividend income = $12 × 0.14

Dividend income = $1.68

Computation of Dividend income next year:

Dividend income next year = Dividend income × number of stock

= $1.68 × 400

= $672

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