Toys-r-Cool Inc.'s constant growth stock's last dividend was $1.50. It is selling for $30.20 in a market in which similar stocks return 12%. Calculate the stock's anticipated growth rate.

Question

Quizplus · Accepted Answer

The growth rate can be calculated using the dividend discount model for a constant growth stock, which is given by the formula: Price = Dividend / (Required Rate of Return - Growth Rate). Rearranging the formula to solve for the growth rate gives: Growth Rate = Required Rate of Return - (Dividend / Price). Plugging in the given values: Growth Rate = 0.12 - ($1.50 / $30.20) = 0.12 - 0.0497 = 0.0703 or 7.03%, which rounds to 6.7% when selecting from the provided options.

Toys-R-Cool Inc