Hooper Lithography has just paid a dividend of $2.00. The stock currently sells for $53.00 and investors require a 10 percent rate of return. At what long-run constant growth rate is the stock expected to grow?

Question

Quizplus · Accepted Answer

The dividend growth model formula is P = D1 / (r - g), where P is the price, D1 is the dividend next year, r is the required rate of return, and g is the growth rate. Given P = $53, D0 = $2, and r = 10%, we find D1 = D0 * (1 + g) = $2 * (1 + g). Plugging into the formula: $53 = $2 * (1 + g) / (0.10 - g). Solving for g gives approximately 6%.

Hooper Lithography Has Just Paid a Dividend of $2