The XYZ Company,whose common stock is currently selling for $40 per share,is expected to pay a $2.00 dividend in the coming year.If investors believe that the expected rate of return on XYZ is 14%,what growth rate in dividends must be expected?
A)5%
B)14%
C)9%
D)6%

Question

Quizplus · Accepted Answer

The dividend growth rate can be calculated using the Gordon Growth Model: 
Expected Rate of Return (R) = Dividend Yield (D1/P0) + Expected Dividend Growth Rate (g)
Rearranging the formula, we get: 
Expected Dividend Growth Rate (g) = R - (D1/P0)

Plugging in the given values: 
R = 14%
D1 = $2.00
P0 = $40.00

Expected Dividend Growth Rate (g) = 14% - (2/40) = 9%

Therefore, the answer is choice C: 9%.

The XYZ Company,whose Common Stock Is Currently Selling for $40