Hey HealthCare Inc. is expected to pay a dividend of $1.25 per share at the end of the year. The...

Question:

Hey HealthCare Inc. is expected to pay a dividend of $1.25 per share at the end of the year. The stock sells for $21.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever.

What is the dividend growth rate?

1. 4.73%

2. 4.87%

3. 5.48%

4. 5.34%

5. 4.69%

Dividend Growth Rate:

The dividend growth rate represents the rate at which the dividend is assumed to grow or decline. In the case of the stock valuation model named the dividend discount model, the dividends are assumed to grow or decline at a constant rate to perpetuity. Based on this assumption the present value of the future dividends is determined, which represents the current market price of the stock.

Answer and Explanation:


Correct answer: Option 5) 4.69%.

Explanation:

Hey HealthCare Inc. has shared the following data:

  • Next dividend, D1 = $1.25
  • Current stock price, P0 = $21.50
  • Required return, r = 10.50%
  • Dividend is expected to grow at a constant rate, g, and g =?

Computation:

We can determine the growth rate by using the dividend growth model equation:

  • P0 = D1 / (r - g)
  • $21.50 = $1.25 / (10.50% - g)
  • (10.50% - g) = 5.81%
  • g = 4.69%

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.5K

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