The XYZ Company, whose common stock is currently selling for $40 per share, is expected to pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return on XYZ is 14%, what growth rate in dividends must be expected?

A) 5%

B) 14%

C) 9%

D) 6%

C) 9%

Explanation:

The computation of the expected growth rate in dividend is shown below:

As we know that

Current stock price = Next year dividend : (Expected rate of return - growth rate in dividend)

$40 = ($2) : (14% - growth rate in dividends)

5.6 - 40 * growth rate = 2

- 40 * growth rate = - 3.6

So, the growth rate in dividend is 9%