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
Expected dividend = Current dividend x (1 + Growth rate) = 0.99 x (1 + Growth)
Price = $24.50
Return = 8.5% = 0.085
0.085 = 0.99 x (1 + Growth) / 24.50 + Growth rate
0.085 x 24.50 = 0.99 + 0.99g + 24.50g
1.0925 = 25.49g
g = Growth rate = 1.0925 / 25.49 = 4.2860%
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Learn more about this topic:
from Finance 101: Principles of FinanceChapter 14 / Lesson 3