Question

A stock is trading at $70 per share. The stock is expected to have a year-end dividend of $2 per share (D1 = $2), and it is expected to grow at some constant rate gL throughout time. The stock's required rate of return is 11% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of gL? Round the answer to three decimal places.

Answer 1

As per the dividend growth model,

gL = required return - (D1 / P0), where P0 is the current price of the stock

The required return is 11%, or 0.11. P0 is $70 as given in the question

gL = 0.11 - (2 / 70) =  0.08143, or 8.143%