What is the expected constant growth rate of dividends for a stock currently priced at $50, that just paid a dividend of $4, and has a required return of 18 percent?
A)3.41 percent
B)5.50 percent
C)9.26 percent
D)12.5 percent

Question

Quizplus · Accepted Answer

We can use the Gordon Growth Model to solve for the expected constant growth rate of dividends:

P = D/(r-g)
where P = stock price, D = dividend payment, r = required return, and g = constant growth rate of dividends

Plugging in the given values: 
$50 = $4/(0.18-g) 
Solving for g: 
g = 0.0926 or 9.26%

Therefore, the expected constant growth rate of dividends is 9.26%, which is answer choice C.

What Is the Expected Constant Growth Rate of Dividends for a Stock