Question

Computer stocks currently provide an expected rate of return of 16%. MBI, a large computer company, will pay a year-end dividend of $2 per share. If the stock is selling at $50 per share, what must be the market’s expectation of the growth rate of MBI dividends?

Answer 1

Growth rate is 12%

Step-by-step explanation:

If we apply Gordon model following formula will be used:

Price per share = Dividend per share / (Return-Growth)

where dividend (D) is prevailing years dividend, K is the expected rate of return is required and (G) is going to be growth rate:

By applying values to the formula we get:

50 = 2 / (16%-G)

=12%