The restaurant chain Applebee's International, Inc. (ticker symbol, APPB) announced an increase of their annual dividend from $0.20 to $0.22 per share in December 2006. This continued a long string of dividend increases. Applebee's was one of few companies that had managed to increase its annual dividend over the past decade. Suppose you want to use the dividend growth model to value Applebee's stock. You believe the dividend will grow at 10 percent per year indefi nitely, and you think the market's required return on this stock is 11 percent.
Let's assume that Applebee's pays dividends annually and that the next annual dividend is expected to be $0.27 per share. The dividend will arrive in exactly one year.
What would you pay for Applebee's stock right now? Suppose you buy the stock today, hold it just long enough to receive the next dividend, and then sell it. What rate of return will you earn on that investment?