What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 13 percent?
A)5.00 percent
B)6.25 percent
C)6.75 percent
D)15.38 percent

Question

Quizplus · Accepted Answer

Using the Gordon Growth Model:

P0 = D1/(r-g)
Where, 
P0 = Price of the stock today
D1 = Next year's dividend forecast
r = Appropriate discount rate
g = Constant growth rate in dividends

Substituting the given values, we get:

$32 = $2/(0.13-g)
0.13-g = $2/$32
0.13-g = 0.0625
g = 0.0675 or 6.75%

Therefore, the constant growth rate in dividends expected for the stock valued at $32.00 is 6.75%. Thus, the answer is option C.

What Constant Growth Rate in Dividends Is Expected for a Stock