Question

1. The market price of a stock is $23.60 and it just paid a dividend of $1.45. The required rate of return is 11.61%. What is the expected growth rate of the dividend?

2. The market price of a stock is $22.47 and it is expected to pay a dividend of $1.08 next year. The required rate of return is 11.12%. What is the expected growth rate of the dividend?

Answer 1

Calculate the growth rate as follows:

Required return = ((Expected dividend)/Current price) + Growth rate

11.61% = ((1.45*(1+growth rate)/23.60) + growth rate

11.61% = 6.1441% + 6.1441%growth rate +growth rate

1.061441 growth rate = 11.61%-6.441%

Growth rate = 0.054659 / 1.061441

Growth rate = 0.0515 or 5.15%

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Calculate the growth rate as follows:

Required return = ((Expected dividend)/Current price) + Growth rate

11.12% = (1.08/22.47) + growth rate

Growth rate = 11.12% - 4.81%

Growth rate = 6.31%.