Question

gay manufacturing is expected to pay a dividend of $1.25 pe share at the end of the year (D1=$1.25). The stock sells for $21.50 per share, and its required rate ofreturn is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Answer 1

D1 = 1.25
P = 21.50
r = 10.5%
dividend growth rate = g

P = D1/(r-g)
g = r - (D1/P)
= 10.5% - (1.25/21.50)
= 10.5% - 5.814%
= 4.686%

dividend growth rate = 4.686%