# Shares of the Katydid Co. common stock are currently selling for $33.60. The last dividend paid... ## Question: Shares of the Katydid Co. common stock are currently selling for$33.60. The last dividend paid was $1.60 per share. The market rate of return is 10%. At what rate is the dividend growing? Assume the market is in equilibrium. ## Dividend Discount Model: This problem entails utilization of the constant growth dividend discount model, which is also known as the Gordon Growth Model. It is a popular stock valuation model which views the fair value of a stock as the sum of all future dividends, discounted to the present, using an appropriate rate. ## Answer and Explanation: The answer is 5.0%. Explanation: The formula for the DDM is provided below. P0 = D1 / (r - g) where, • P0 = intrinsic value of stock • D1 = dividend payment one year from today • r = discount rate • g = growth rate To solve for g, we must be cognizant of the fact that D1 = D0(1 + g), where D0 is the last dividend paid. Armed with this awareness, we can structure and solve the problem, using known information, as follows:$33.60 = $1.60(1 + g) / (0.10 - g)$3.36 - $33.60g =$1.60 + $1.60g$1.76 = \$35.2g

g = 0.05 or 5.0% 