Xytex Products just paid a dividend of $2.62 per share, and the stock currently sells for $36. If the discount rate is 15 percent, what is the dividend growth rate?

Growth rate___%.

Po = Do (1 + g)

Ke - g

$36 = $2.62 (1 + g)

0.15 - g

$36 (0.15 - g) = $2.62 (1 + g)

$5.4 - 36g = $2.62 - 2.62g

$5.4 - $2.62 = - 2.62g + 36g

$2.78 = 33.38g

2.78 = g

33.38

g = 0.0833 = 8.33%

Explanation:

In this case, we will apply the formula for determining the current market price of a share (Po). The current market price, the current dividend paid (Do) and the discount rate (Ke) were provided in the question with the exception of growth rate (g). Therefore, we will make the growth rate the subject of the formula.