If the dividends paid on a common stock issue are $4.00 per share, the cost of equity is 15%, and price of the common stock is $40, calculate the growth rate.
A) 7%
B) 5%
C) 25%
D) 8%

Question

Quizplus · Accepted Answer

The growth rate can be calculated using the Gordon Growth Model formula: Cost of Equity = (Dividend/Price) + Growth Rate. Rearranging gives Growth Rate = Cost of Equity - (Dividend/Price). Substituting the given values: 15% - ($4/$40) = 15% - 10% = 5%.

If the Dividends Paid on a Common Stock Issue Are