A company 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 expected annual growth rate can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity) formula: Cost of Equity = (Dividend per Share / Price per Share) + Growth Rate. Rearranging the formula to solve for the growth rate gives: Growth Rate = Cost of Equity - (Dividend per Share / Price per Share). Plugging in the given values: Growth Rate = 0.08 - ($2.50 / $42.00) = 0.08 - 0.0595 = 0.0205 or approximately 2%.

A Company Costs $42