Question

Common stock​ value: Constant growth The common stock of Barr Labs​ Inc., trades for ​$120 per share. Investors expect the company to pay​ a(n) ​$1.37 dividend next​ year, and they expect that dividend to grow at a constant rate forever. If investors require​ a(n) 15.8​% return on this​ stock, what is the dividend growth rate that they are​ anticipating?

Answer 1

Dividend growth rate anticipated = 14.66%

Step-by-step explanation:

Using dividend growth model we have

P
`{_0}` =
`\frac{D{_1}}{K{_e} - g}`

Where P
`{_0}` = Current market price = $120

D
`{_1}` = Dividend to be paid at year end or next year = $1.37

K
`{_e}` = Expected return on equity = 15.8%

g = Expected growth rate

Now putting values we have

$120 =
`(1.37)/(0.158 - g)`

0.158 - g =
`(1.37)/(120) = 0.0114`

0.158 - 0.0114 = g

0.1466 = g = 14.66%