A stock is currently selling for $62. The required return is 12 percent, and the stock is expected to pay an annual dividend of $3.18 next year. What is the perpetual dividend growth rate for this stock?

Question

Quizplus · Accepted Answer

The perpetual dividend growth rate can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetually growing dividend), which is P = D / (r - g), where P is the price of the stock, D is the dividend next year, r is the required return, and g is the growth rate. Rearranging the formula to solve for g gives us g = r - (D / P). Plugging in the values: g = 0.12 - (3.18 / 62) = 0.12 - 0.0513 = 0.0687 or 6.87%.

A Stock Is Currently Selling for $62