A certain stock currently pays a dividend of $1.80 and is selling for $49.50. If the required rate of return on this stock is 14%, what is the implied expected dividend growth rate? Round your
Answer to the nearest tenth of a percent.

Question

Quizplus · Accepted Answer

The Gordon Growth Model (also known as the Dividend Discount Model for a perpetuity) calculates the intrinsic value of a stock based on its future series of dividends that grow at a constant rate. The formula is P = D / (r - g), where P is the price of the stock, D is the dividend, r is the required rate of return, and g is the growth rate of the dividend. Rearranging the formula to solve for g gives us g = r - (D / P). Substituting the given values (r = 0.14, D = 1.80, P = 49.50) gives us g = 0.14 - (1.80 / 49.50) = 0.14 - 0.03636 = 0.10364, or 10.36% when rounded to the nearest tenth of a percent. Since this option is not listed, the correct answer is D) none of the above.

A Certain Stock Currently Pays a Dividend of $1