McDonnell Manufacturing is expected to pay a dividend of $1.50 per share at the end of the year...

Question:

McDonnell Manufacturing is expected to pay a dividend of $1.50 per share at the end of the year (D1 = $1.50). The stock sells for $34.00 per share, and its required rate of return is 11.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Dividend Growth Rate:

The dividend growth rate determines the expected capital gains yield of a stock. This is because the price of a stock, all else the same, is expected to increase at a rate that is equal to the growth rate of dividends.

Answer and Explanation:

We can use the dividend growth model to compute the growth rate of dividend as follows:

  • dividend growth rate = required return - next dividend / current price
  • dividend growth rate = 11.5% - 1.5 / 34
  • dividend growth rate = 7.09%

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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