Exabyte Products just paid a dividend of $2.17 per share, and the stock currently sells for $40....

Question:

Exabyte Products just paid a dividend of $2.17 per share, and the stock currently sells for $40.

If the discount rate is 13%, what is the dividend growth rate?

Dividend Growth Rate

Dividend growth rate is represented as the percentage growth rate of the dividend. It is abbreviated as DGR. Dividend growth is generally calculated on annual basis.

Answer and Explanation:

Given that Current Dividend, {eq}D_{0} {/eq} = $2.17, Selling price of stock, {eq}P_{0} {/eq} = $40 and discount rate, {eq}r {/eq} = 13%

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}40 = \frac{2.17(1 + g)}{0.13 - g} {/eq}

{eq}40 (0.13 - g) = 2.17 (1 + g) {/eq}

{eq}5.2 - 40g = 2.17 + 2.17g {/eq}

{eq}42.17g = 3.03 {/eq}

{eq}g {/eq} = 0.07185 or 7.185%

Hence, the dividend growth rate is 7.185%.


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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