Tangshan China Company's stock is currently selling for $80.00 per share. The expected dividend one year from now is $4.00 and the required return is 13 percent. What is Tangshan's dividend growth rate assuming that dividends are expected to grow at a constant rate forever?

Question

Quizplus · Accepted Answer

The dividend growth rate can be found using the Gordon Growth Model (Dividend Discount Model for a perpetuity), which is P = D / (r - g), where P is the price, D is the dividend, r is the required return, and g is the growth rate. Rearranging the formula to solve for g gives g = r - (D / P). Substituting the given values, g = 0.13 - (4 / 80) = 0.13 - 0.05 = 0.08 or 8%.

Tangshan China Company's Stock Is Currently Selling for $80