The stock price of Baskett Co. is $54.20. Investors require a return of 12 percent on similar stocks. If the company plans to pay a dividend of $3.75 next year, what growth rate is expected for the company's stock price?

5.08%

Explanation:

using the Gordon growth model we can calculate the expected growth rate:

current stock price = dividend / (required rate of return - growth rate)

$54.20 = $3.75 / (12% - g)

12% - g = $3.75 / $54.20

12% - g = 6.92%

g = 12% - 6.92% = 5.08%