Phillips Industries common stock currently sells for $50 and is expected to pay a dividend of $3.00 next year. Determine the implied growth rate for Phillips Industries dividends assuming that an investor's required rate of return on this stock is 14%.
A) 6%
B) 8%
C) 14%
D) 20%

Question

Quizplus · Accepted Answer

The formula for the dividend growth rate (g) is:
g = (Dividend next year / Current stock price) - 1
g = ($3.00 / $50) - 1
g = 0.06 or 6%
The investor's required rate of return is not relevant for calculating the growth rate, only for determining whether or not the stock is a good investment.

Phillips Industries Common Stock Currently Sells for $50 and Is