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Exabyte Products just paid a dividend of $1.80 per share, and the stock currently sells for $60....

Question:

Exabyte Products just paid a dividend of $1.80 per share, and the stock currently sells for $60.

If the discount rate is 11%, what is the dividend growth rate?

Growth rate in dividends

There are three methods for calculating the growth rate in dividends.

i. Using past dividend growth rates,

ii. Observe the current dividend growth rate in the industry

iii. Determining the sustainable growth rate

Answer and Explanation:

Given that Current Dividend, {eq}D_{0} {/eq} = $1.80, Selling price of stock, {eq}P_{0} {/eq} = $60 and discount rate, {eq}r {/eq} = 11%

To find the dividend growth rate, {eq}g {/eq}, we use gordon growth model,

{eq}P_{0} = \frac{D_{0}(1 + g)}{r - g} {/eq}

{eq}60 = \frac{1.80(1 + g)}{0.11 - g} {/eq}

{eq}60 (0.11 - g) = 1.80 (1 + g) {/eq}

{eq}6.6 - 60g = 1.80 + 1.80g {/eq}

{eq}61.80g = 4.80 {/eq}

{eq}g {/eq} = 0.0770 or 7.70%

Hence, the dividend growth rate is 7.70%.


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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