Llano's stock is currently selling for $51. The expected dividend one year from now is $1.50 and the required return is 10%. What is this firm's dividend growth rate assuming the constant dividend growth model is appropriate?

Question

Quizplus · Accepted Answer

The constant dividend growth model is given by $ P_0 = \frac{D_1}{r - g} $, where $P_0$ is the current stock price, $D_1$ is the dividend one year from now, $r$ is the required return, and $g$ is the dividend growth rate. Rearranging the formula to solve for $g$, we get $ g = r - \frac{D_1}{P_0} $. Plugging in the given values: $ g = 0.10 - \frac{1.50}{51} = 0.10 - 0.0294 = 0.0706 $, which is approximately 7%.

Llano's Stock Is Currently Selling for $51