Copyright

Johnson Corporation's stock is currently selling for $45.83 per share. The last dividend paid...

Question:

Johnson Corporation's stock is currently selling for $45.83 per share. The last dividend paid (D0) was $2.50. Johnson is a constant growth firm. If investors require a return of 16% on Johnson s stock, what do they think Johnson s growth rate will be?

Dividend Growth Model:

The dividend growth model is a stock valuation model that calculates the fair market value of the stock based on the constant growth of the company's dividend and the investors' required rate of return.

Answer and Explanation:

Formula on calculating the stock's dividend growth rate:

{eq}\begin{align*} Dividend~constant~growth~rate&=Required~return-\frac{Dividend}{Stock~price}\\ &=.16-\frac{2.50}{45.83}\\ &=.16-.05455\\ &=.10545\\ \end{align*} {/eq}

The constant growth rate of the company's dividend is 10.545%


Learn more about this topic:

Loading...
The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.8K

Related to this Question

Explore our homework questions and answers library