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 $33.00 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?

Answer 1

Required return=(D1/Current price)+Growth rate

0.105=(1.25/33)+Growth rate

Growth rate=0.105-(1.25/33)

which is equal to

=6.71%(Approx).