A firm is expected to pay a $4.00 dividend per share. The stock is selling in the market place for $55.00 per share. If investors are demanding 12 percent on this stock, what is this stock's growth rate?
A) 4.73 percent
B) 7.25 percent
C) 5.91 percent
D) 6.14 percent

Question

Quizplus · Accepted Answer

The correct answer is A because the growth rate of the stock is 4.73 percent. This can be calculated using the following formula:Growth rate = (Dividend yield - Required return) / (1 - Required return)Dividend yield = Dividend per share / Stock priceDividend yield = $4.00 / $55.00 = 0.0727Required return = 12% = 0.12Growth rate = (0.0727 - 0.12) / (1 - 0.12) = 0.0473 = 4.73%

A Firm Is Expected to Pay a $4