You are considering the purchase of Miller Manufacturing,Inc.'s ordinary shares.The shares are 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 share is returning 15%,calculate the growth rate of dividends.

Question

Quizplus · Accepted Answer

The growth rate (g) can be calculated using the Gordon Growth Model (Dividend Discount Model): Price = Dividend / (Required Return - Growth Rate). Rearranging gives Growth Rate = Required Return - (Dividend / Price). Substituting the given values: 15% - ($2.10 / $21.00) = 15% - 10% = 5%.

You Are Considering the Purchase of Miller Manufacturing,Inc