You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is selling for $21.00 per share. The next dividend is expected to be $2.10, and you expect the dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the growth rate of dividends.
A) 3%
B) 5%
C) 8%
D) 10%

Question

Quizplus · Accepted Answer

Using the constant growth dividend formula: 
Dividend = Next Dividend / (Required Rate of Return - Growth Rate)
$2.10 = $2.10 / (0.15 - Growth Rate)
Solving for the growth rate results in 0.05 or 5%. Therefore, the growth rate of dividends is 5%.

You Are Considering the Purchase of Miller Manufacturing, Inc