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?

Question

Quizplus · Accepted Answer

The correct answer is A because the expected annual growth rate of the company's dividends is 2%. This can be calculated using the Gordon Growth Model, which states that the expected annual growth rate of dividends is equal to the dividend yield minus the cost of equity. In this case, the dividend yield is $2.50/$42.00 = 5.95%, and the cost of equity is 8%. Therefore, the expected annual growth rate of dividends is 5.95% - 8% = 2%.

A Company Has Stock Which Costs $42