According to the Gordon growth model,if the stock price is $21,required return on equity is 10% and the current dividend is $1,what is the expected growth rate of dividends?

Question

Quizplus · Accepted Answer

According to Gordon Growth Model, the formula is:
P = D/(r-g)
Where,
P = Stock Price
D = Current Dividend
r = Required Rate of Return on Equity
g = Expected Growth Rate of Dividends

Putting the given values in the formula,
21 = 1/(0.10-g)
0.10-g = 1/21
g = 0.0476 or 4.76%
Therefore, the expected growth rate of dividends is 4.76%. This is not one of the options given, so we round it up to the closest option, which is B) 5%.

According to the Gordon Growth Model,if the Stock Price Is