Shares of Hot Donuts common stock are currently selling for $32.35.The last annual dividend paid was $1.25 per share and the market rate of return is 10.7 percent.At what rate is the dividend growing?
A)6.58 percent
B)8.67 percent
C)10.42 percent
D)12.60 percent
E)14.10 percent

Question

Quizplus · Accepted Answer

The dividend growth rate can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model for a growing dividend), which is given by the formula: P = D0 * (1 + g) / (r - g), where P is the current stock price, D0 is the last dividend paid, r is the required rate of return (market rate of return), and g is the growth rate of the dividend. Rearranging the formula to solve for g gives us: g = [(P * r) / D0] - 1 - D0/P. Substituting the given values: g = [(32.35 * 0.107) / 1.25] - 1 - 1.25/32.35, we find that the closest answer is 6.58 percent, indicating that the dividend is growing at this rate.

Shares of Hot Donuts Common Stock Are Currently Selling for $32.35.The