A share of stock is currently selling for $20.80. If the dividend just paid is $2.00 and investors are seeking a 14% return, what is the anticipated rate of constant growth?

Question

Quizplus · Accepted Answer

To find the anticipated rate of constant growth, we can use the Gordon Growth Model:

Stock Price = Dividend / (Required Rate of Return - Anticipated Rate of Constant Growth)

Plugging in the given values:

$20.80 = $2.00 / (0.14 - Anticipated Rate of Constant Growth)

Solving for Anticipated Rate of Constant Growth:

Anticipated Rate of Constant Growth = 0.04 or 4%

Therefore, the answer is B.

A Share of Stock Is Currently Selling for $20