A firm's recent dividend was $4.00 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?

Question

Quizplus · Accepted Answer

The growth rate can be calculated using the Gordon Growth Model (Dividend Discount Model): Price = Dividend / (Required Rate of Return - Growth Rate). Rearranging for growth rate gives: Growth Rate = Required Rate of Return - (Dividend / Price). Substituting the given values: Growth Rate = 0.12 - (4 / 55) = 0.0441 or 4.41 percent.

A Firm's Recent Dividend Was $4