Lawton Company common stock currently sells for $38 and pays (year 0) a dividend of $2. Determine the implied growth rate for Lawton assuming that an investor's required rate of return is 12% and that the stock can be evaluated using a constant growth valuation model.

Question

Quizplus · Accepted Answer

Using the constant growth valuation model, we can calculate the implied growth rate as follows:

stock price = dividend / (required rate of return - growth rate)

$38 = $2 / (0.12 - growth rate)

0.12 - growth rate = 2 / 38

0.12 - growth rate = 0.0526

growth rate = 0.0674 or 6.74%

Therefore, the implied growth rate for Lawton Company is 6.74%.

The closest option is C (6.40%), which could be due to rounding differences. Option A (6.74%) is also close, but it is the exact calculated value rather than a rounded approximation. Option B (17.26%) and D (3.80%) are far from the calculated value and can be eliminated.

Lawton Company Common Stock Currently Sells for $38 and Pays