Levine Properties' stock has a required return of 10 percent. The stock currently trades at $50 per share. The year-end dividend, D1, is expected to be $1.00 per share. After this payment, the dividend is expected to grow by 25 percent per year for the next three years. That is, D4 = $1.00(1.25)3 = $1.953125. After t = 4, the dividend is expected to grow at a constant rate of X percent per year forever. What is the stock's expected constant growth rate after t = 4? In other words, what is X?

Question

Quizplus · Accepted Answer

The stock's price is the present value of expected future dividends. Using the Gordon Growth Model for the period after t = 4, we can solve for the constant growth rate X. The formula is P = D4 / (r - g), where P is the price, D4 is the dividend at t = 4, r is the required return, and g is the growth rate. Solving for g gives us approximately 6.87%.

Levine Properties' Stock Has a Required Return of 10 Percent