Candy Apple Cakes' stock has a current market value of $40.50.The company just paid a dividend equal to $1.50 per share,which is expected to grow at a constant rate forever into the future.If Candy Apple's marginal investors require a rate of return equal to 12 percent,what is the rate at which dividends are expected to grow in the future?
A) 8.3%
B) 12.0%
C) 4.0%
D) 8.0%
E) There is not enough information to answer this question.

Question

Quizplus · Accepted Answer

To calculate the expected future growth rate of dividends (g), we can use the Gordon Growth Model: 
g = (r - dividend yield) or g = (r - D1/P0), where r is the required rate of return (12%), D1 is the expected dividend next year, and P0 is the current market value per share. 
We already have P0 ($40.50) and the dividend yield ($1.50/$40.50 = 3.70%). So, we can use the first equation: 
g = 12% - 3.70% = 8.30% 
Therefore, the expected rate at which dividends are expected to grow in the future is 8.30%, which is option D.

Candy Apple Cakes' Stock Has a Current Market Value of $40.50.The