Hot Teas common stock is currently selling for $38.97. The last annual dividend paid was $1.26 per share and the market rate of return is 13.2 percent. At what rate is the dividend growing?

Question

Quizplus · Accepted Answer

The dividend growth rate can be calculated using the Gordon Growth Model (Dividend Discount Model): Price = Dividend / (Required Rate of Return - Growth Rate). Rearranging the formula to solve for the growth rate gives: Growth Rate = Required Rate of Return - (Dividend / Price). Substituting the given values: Growth Rate = 0.132 - (1.26 / 38.97) = 0.0965 or 9.65 percent.

Hot Teas Common Stock Is Currently Selling for $38