The stock of Melody Music City is selling for $37.50 and pays a current annual dividend of $1.10. What is the implied growth rate of dividends for this firm (assume dividends are expected to grow at a constant rate) if an investor's required rate of return is 14 percent?

Question

Quizplus · Accepted Answer

The implied growth rate (g) can be calculated using the Gordon Growth Model: Price = Dividend / (Required Rate of Return - Growth Rate). Rearranging gives: Growth Rate = Required Rate of Return - (Dividend / Price). Substituting the given values: 0.14 - (1.10 / 37.50) = 0.1075 or 10.75%.

The Stock of Melody Music City Is Selling for $37