Shares of Hot Donuts common stock are currently selling for $32.35. The last annual dividend paid was $1.10 per share and the market rate of return is 10.7 percent. At what rate is the dividend growing?

Question

Quizplus · Accepted Answer

The dividend growth rate can be calculated using the Gordon Growth Model (Dividend Discount Model): P = D1 / (r - g), where P is the price, D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate. Rearranging for g gives g = r - (D1/P). Here, D1 = $1.10 * (1 + g), P = $32.35, and r = 10.7%. Solving for g gives approximately 7.06%.

Shares of Hot Donuts Common Stock Are Currently Selling for $32.35