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Exabyte Products just paid a dividend of $0.99 per share, and the stock currently sells for...

Question:

Exabyte Products just paid a dividend of $0.99 per share, and the stock currently sells for $24.50.

If the discount rate is 8.5%, what is the dividend growth rate?

Dividend growth model:

Dividend growth model or the Gordon's growth model is the model used to find out the return required from the stock which pays perpetual dividends with a constant growth rate.

Answer and Explanation:

As per dividend growth model,

Return = Expected dividend / Current price + Growth rate

Here,

Expected dividend = Current dividend x (1 + Growth rate) = 0.99 x (1 + Growth)

Price = $24.50

Return = 8.5% = 0.085

or,

0.085 = 0.99 x (1 + Growth) / 24.50 + Growth rate

or,

0.085 x 24.50 = 0.99 + 0.99g + 24.50g

or,

1.0925 = 25.49g

or,

g = Growth rate = 1.0925 / 25.49 = 4.2860%


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
10K

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