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The common stock of General Land Development Company (GLDC) is expected to pay a dividend of...

Question:

The common stock of General Land Development Company (GLDC) is expected to pay a dividend of {eq}\$1.25 {/eq} next year and currently sells for {eq}\$25 {/eq}. Assume that the firm's future dividend payments are expected to grow at a constant rate for the foreseeable future. Determine the implied growth rate of GLDC's dividends (and earnings), assuming that the required rate of return of investors is {eq}12 \% {/eq}.

Implied Growth Rate of Dividend:

A growth rate generally means an increase or decrease in a variable over a period of time. An implied growth rate of dividends is the rate at which the dividends paid on a company's stock are expected to increase or decline. In order to determine the current stock price under the dividend growth model, the growth rate is assumed to be constant to perpetuity.

Answer and Explanation:


Answer:

GLDC's implied growth rate is 7%.

Explanation:

General Land Development Company (GLDC) has shared the following data:

  • Next dividend, D1 = $1.25
  • Current stock price, P0 = $25
  • Required return, r = 12%
  • Constant growth rate, g =?

Computation:

Using the dividend growth model:

  • P0 = D1 / (r - g)
  • (12% - g) = $1.25 / $25
  • g = 7%

Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.4K

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