Xytex Products just paid a dividend of $1.67 per share, and the stock currently sells for $36. If...

Question:

Xytex Products just paid a dividend of $1.67 per share, and the stock currently sells for $36. If the discount rate is 10 percent, what is the dividend growth rate?

Dividend Growth Model:

Dividend growth model is a valuation model used for valuing the stock price and assumes the dividends from stock to grow at a stable or a constant rate g. The present value of the future dividends discounted at a required return Ke is the value of the stock today as per the model. Growth rate is the rate at which the dividends are expected to grow in future. As per the model, Price (P0) = D1 / (Ke - g).

Answer and Explanation:

The dividend growth rate g is 5.12%

Given:

Dividend D0 = $1.67 per share

Current price of the stock P0 = $36

Required rate of return (Ke) = 10%

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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