Xytex Products just paid a dividend of $2.35 per share, and the stock currently sells for $59.
If the discount rate is 14 percent, what is the dividend growth rate?
Dividend Growth Rate:
The dividend growth rate is the rate at which the dividend pertaining to a stock grows each year where the growth rate can be constant or changing as the company deems fit depending on their profitability. The dividend growth rate is assumed to be constant under the dividend growth model which is used to determine the current price of the stock.
Answer and Explanation:
Answer: Xytex Product's dividend growth rate is 9.63%.
As per the data of Xytex Products:
- Last dividend, D0 = $2.35
- Current share price, P0 = $59
- Required return, r = 14%
As per the dividend growth model,
- P0 = D0 * (1 + g) / (r - g)
- $59 * (14% - g) = $2.35 * (1 + g)
- $8.26 - $59g = $2.35 + $2.35g
- $61.35g = $5.91
- g = 9.63%
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from Finance 101: Principles of FinanceChapter 14 / Lesson 3