CDB stock is currently priced at $83. The company will pay a dividend of $5.61 next year and investors require a return of 11.7 percent on similar stocks. What is the dividend growth rate on this stock?

4.94% = g

Explanation:

The Dividend Valuation Model is a technique used to value the worth of an asset. According to this model, the value of an asset is the sum of the present values of the future cash flows would that arise from the asset discounted at the required rate of return.

The model is stated below as follows

P = D/ke-g)

Ke = 11.7%, D = 5.61%, g = ?

So we apply the model to work out "g"

83 = 5.61 / (0.117 - g)

cross multiplying

83 * (0.117-g) = 5.61

9.711 - 83g = 5.61

971.1 - 5.61 = 83g

Divide both sides by 83

(971.1 - 5.61) / 83 = g

0.049409639 * 100 = g

4.94% = g

Dividend growth rate is 4.94%

Explanation:

The share price formula comes handy in this case in determining the dividend growth rate.

Share price=Next year dividend/expected return-dividend growth rate

share price is $83

next year dividend is $5.61

expected return is 11.7%

Dividend growth rate is the unknown which is denoted by g here

$83=$5.61/11.7%-g

by cross multiplication the equation becomes:

$83 * (11.7%-g) = $5.61

divide both sides by $83

11.7%-g=$5.61/$83

11.7%-g=0.06759

g=11.7%-0.06759

g=0.117-0.06759

g=0.04941

g=4.94%