Question

. Computer stocks currently provide an expected rate of return of 14%. MBI, a large computer company, will pay a year-end dividend of $1 per share. If the stock is selling at $20 per share, what must be the market's expectation of the growth rate of MBI dividends? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

9%

Step-by-step explanation:

The computation of the growth rate is shown below:

Current selling price = Next year dividend ÷ (Required rate of return - growth rate)

$20 = $1 ÷ (14% - growth rate)

$180 ÷ $100 = $20 growth rate

$1.8 = $20 growth rate

So, the growth rate would be 9%

Simply we apply the current selling price formula so that the growth rate can be correctly computed.