Luther Industries has a dividend yield of 4.5% and a cost of equity capital of 12%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends are closest to:

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can solve for the expected growth rate of dividends:
Cost of equity capital = (Dividend / Share price) + Growth rate of dividends
12% = (Dividend / Share price) + Growth rate of dividends
Given dividend yield = 4.5%, we have Dividend/Share price = 4.5%
12% = 4.5% + Growth rate of dividends
Growth rate of dividends = 7.5% (option C)

Luther Industries Has a Dividend Yield of 4