Question

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D₁ = $1.25). The stock sells for $25.00 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Select the correct answer.

a. 5.88%

b. 5.69%

c. 6.07%

d. 5.50%

e. 6.26%

Answer 1

d. 5.50%

Growth rate(g) = rs - D1/P0

Growth rate(g) = 0.105 - ($1.25/$25.00)

Growth rate(g) = 0.105 - 0.05

Growth rate(g) = 0.055 or 5.50%