Transportation shares currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the shares are selling at $60 per share, what must be the market's expectation of the constant growth rate of TTT dividends?

Question

Quizplus · Accepted Answer

We can use the Gordon Growth Model to solve this problem:

Expected Return on TTT = Dividend Yield + Expected Dividend Growth Rate

15% = ($3/$60) + Expected Dividend Growth Rate

Expected Dividend Growth Rate = 10%

Therefore, the market's expectation of the constant growth rate of TTT dividends is 10%.

Transportation Shares Currently Provide an Expected Rate of Return of 15