The common stock of Kute & Kuddly Kids Clothes, Inc.currently sells for $88.50 and its current (D0) dividend is $1.10.Determine the implied growth rate for Kute assuming that an investor's required rate of return is 14% and that earnings and dividends are expected to grow at a constant rate.

Question

Quizplus · Accepted Answer

The implied growth rate (g) can be calculated using the Gordon Growth Model: P0 = D0*(1+g)/(r-g). Rearranging for g gives g = (r*P0 - D0)/(P0 + D0). Substituting the given values: g = (0.14*88.50 - 1.10)/(88.50 + 1.10) = 12.6%.

The Common Stock of Kute & Kuddly Kids Clothes, Inc