A firm is expected to pay a $2.00 dividend per share. The stock is selling in the market place for $50.00 per share. If investors are demanding 10% on this stock, what is this stock's growth rate?

Question

Quizplus · Accepted Answer

The growth rate (g) can be calculated using the Gordon Growth Model formula: Price = Dividend / (Required Rate of Return - Growth Rate). Rearranging gives: Growth Rate = Required Rate of Return - (Dividend / Price). Substituting the given values: g = 0.10 - (2/50) = 0.10 - 0.04 = 0.06 or 6.00%.

A Firm Is Expected to Pay a $2