Question

Luther Industries has a dividend yield of 4.5% and and a cost of equity capital of 12%. Luther Industries' dividends are expected to grow at a constant rate indefinitely. The growth rate of Luther's dividends are closest to:Question 7 options:A) 7.5%B) 5.5%C) 16.5%D) 12%

Answer 1

A) 7.5%

Step-by-step explanation:

To calculate Luther Industries' dividends growth rate we must use the following perpetuity formula:

Present Value = Dividend / (r - growth rate)

r - g = Div / PV

r = Div / PV + g

Where Dividend / Present value = 4.5%, and r = 12%, then:

12% = 4.5% + g

12% - 4.5% = g

g = 7.5%