Question

The Sisyphean​ Company's common stock is currently trading for $ 26.25 per share. The stock is expected to pay a $ 2.6 dividend at the end of the year and the Sisyphean​ Company's equity cost of capital is 15​%. If the dividend payout rate is expected to remain​ constant, then the expected growth rate in the Sisyphean​ Company's earnings is closest​ to

Answer 1

5%

Step-by-step explanation:

Let recall the DDM (dividen discount model) model for stock valuation:

V_o = [D_o x (1 + g)]/(r-g), where:

V_o: Intrinsic value of the mentioned stock;

D_o: Current dividend per share. Please note that D_o x (1+g) = D_1 = Expected dividend paid at the end of the year.

g: long-term earning growth;

r: cost of equity.

Putting all together, we have:

26.25 = 2.6/(0.15 - g). Solve the equation: g = 0.15 - (2.6/26.25) = 5% (approximately).