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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?

User Mmoran
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1 Answer

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Answer:

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%

User Sangeetha
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