Given that the cost of common stock is 18 percent, dividends are $1.50 per share, and the price ofthe stock is $12.50 per share, what is the annual growth rate of dividends?

Question

Quizplus · Accepted Answer

The cost of common stock (required rate of return) is calculated using the formula: Cost of Equity = (Dividends/Price) + Growth Rate. Rearranging for the growth rate gives: Growth Rate = Cost of Equity - (Dividends/Price). Substituting the given values: Growth Rate = 0.18 - (1.50/12.50) = 0.18 - 0.12 = 0.06 or 6%.

Given That the Cost of Common Stock Is 18 Percent