Toronto Skates Inc.is offering a dividend of $1 next year and the share currently sells for $20 per share.If the required rate of return is 8.0%, what is the dividend growth rate?

Question

Quizplus · Accepted Answer

We can use the constant growth (Gordon) model to solve for the dividend growth rate:

P = D/(r-g)

where P is the current stock price, D is the most recent dividend, r is the required rate of return, and g is the dividend growth rate.

Plugging in the given values, we have:

20 = 1/(0.08 - g)
20(0.08 - g) = 1
1.6 - 20g = 1
-20g = -0.6
g = 0.03 or 3%

Therefore, the dividend growth rate is 3%, which is option C.