A company has stock which costs $42.00 per share and pays a dividend of $2.50 per share this year.The company's cost of equity is 8%.What is the expected annual growth rate of the company's dividends?

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Quizplus · Accepted Answer

The correct answer is A.The expected annual growth rate of the company's dividends can be calculated using the Gordon Growth Model:Dividend Growth Rate = (Dividend Yield - Cost of Equity) / (1 - Dividend Payout Ratio)Dividend Yield = Dividend per Share / Stock Price = $2.50 / $42.00 = 5.95%Dividend Payout Ratio = Dividend per Share / Earnings per Share = $2.50 / $5.00 = 50%Therefore, Dividend Growth Rate = (5.95% - 8%) / (1 - 50%) = 2%

A Company Has Stock Which Costs $42