This is the next dividend to be paid divided by the current stock price. The constant growth model (or dividend growth model) calls for the growth rate to be added to that quotient.
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To answer this, we use the dividend growth model, also called the constant growth model in the form C re = (d1/P0) + g, where d1 is the next dividend to be paid. Since this question gives the most recent dividend paid (i.e., the last dividend), we need to increase it by 9% to get the next dividend to be paid. The next dividend will be $3 × 1.09, or $3.27. Plugging the numbers into the formula, we get ($3.27 / $36) + .09, which is .1808 or 18.08%.
This answer results from using the last dividend paid in the dividend growth model, also called the constant growth model. The dividend growth model calls for the use of the next dividend to be paid. Therefore, the last dividend paid needs to be increased by the expected growth rate for one year to find the next dividend to be paid.
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