Question

Taggart transcontinental has a dividend yield of 2.5% .Taggarts equity cost of capital is 10% and its dividends are expected to grow at a constant rate. Based on this information taggarts constant growth rate in dividends is closest to :

A)5%
B)2.5%
C)10%
D)7.5%

Answer 1

D) 7.5%

Explanation:

Using dividend growth model,

Price, P = D / (r - g)

where, D = Dividend, r = cost of equity = 10% , and g= growth rate

we know that

=> r - g = D / P = Dividend yield = 2.5%

=> Growth rate, g = 10% - 2.5% = 7.5%

therefore the constant growth rate in dividends is closest to= 7.5%