What is the expected constant-growth rate of dividends for a stock with a current price of $87, an expected dividend payment of $5.40 per share, and a required return of 16%?

Question

Reagan Mcintosh

Business

18 May, 05:22

What is the expected constant-growth rate of dividends for a stock with a current price of $87, an expected dividend payment of $5.40 per share, and a required return of 16%?

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Answers (1)

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Alexia Galvan · Answer 1

Expected growth rate is 9.79%

Explanation:

Stock price can be calculated from dividend growth model by using the dividend paid, expected growth rate of dividend and rate of return. As we have the price of stock we can calculate the growth rate of dividend by following formula.

Price of Bond = Dividend / (rate of return - expected growth rate)

$87 = $5.40 / (0.16 - expected growth rate)

0.16 - expected growth rate = $5.40 / $87

0.16 - expected growth rate = 0.062069

Expected growth rate = 0.16 - 0.062069

Expected growth rate = 0.097931 = 0.0979 = 9.79%