The common stock of Kute & Kuddly Kids Clothes, Inc., currently sells for $88.50, and its current (D₀) dividend is $1.10. Determine the implied growth rate for Kute assuming that an investor's required rate of return is 14% and that earnings and dividends are expected to grow at a constant rate.

Question

Quizplus · Accepted Answer

The implied growth rate (g) can be calculated using the Gordon Growth Model: Price = D0 * (1 + g) / (r - g). Rearranging for g gives g = (Price * r - D0) / (Price + D0). Substituting the given values: g = ($88.50 * 0.14 - $1.10) / ($88.50 + $1.10) = 12.6%.

The Common Stock of Kute & Kuddly Kids Clothes, Inc