What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 13 percent?
A)5.00 percent
B)6.25 percent
C)6.75 percent
D)15.38 percent $32.00 =

Question

Quizplus · Accepted Answer

We can use the constant growth dividend model to solve for the expected growth rate. 
$2.00 = $2.00/(0.13-g) where g is the growth rate
Rearranging the equation, we get 0.13-g = $2.00/$32.00 = 0.0625
Therefore, g = 0.0675 or 6.75% (rounded to two decimal places) which is option C.

What Constant Growth Rate in Dividends Is Expected for a Stock