With a stock's present dividend at $2.00, a market return of 12%, and a selling price today of $30.00, a constant growth stock's growth rate is 5%.

Question

Quizplus · Accepted Answer

We can use the Gordon Growth Model to calculate the expected selling price of the stock in one year:

Expected Selling Price = (Dividend / (Market Return - Growth Rate)) + Present Selling Price

Expected Selling Price = ($2.00 / (0.12 - 0.05)) + $30.00

Expected Selling Price = $27.03 + $30.00

Expected Selling Price = $57.03

Since the expected selling price is higher than the present selling price, we can conclude that the constant growth rate of 5% is indeed true.

With a Stock's Present Dividend at $2