Question

A stock with the required rate of return of 13.62% is expected to pay a $1.03 dividend over the next year. The dividends are expected to grow at a constant rate forever. The intrinsic value of the stock is $22.14 per share. What is the constant growth rate (in %, to the nearest 0.01%)? E.g., if your answer is 4.236%, record it as 4.24.

Answer 1

The constant growth rate can be calculated using the Gordon Growth Model. By plugging in the given values, we can solve for the growth rate, which is approximately 8.96%.

Step-by-step explanation:

To find the constant growth rate, we can use the Gordon Growth Model. The formula for the intrinsic value of a stock using this model is:

V0 = D1 / (r - g)

where V0 is the intrinsic value of the stock, D1 is the expected dividend next year, r is the required rate of return, and g is the constant growth rate. Plugging in the given values, we can solve for g:

22.14 = 1.03 / (0.1362 - g)

Simplifying the equation, we get:

22.14 * (0.1362 - g) = 1.03

Dividing both sides by 22.14, we have:

0.1362 - g = 0.0465704

Subtracting 0.1362 from both sides, we get:

g = 0.1362 - 0.0465704 = 0.0896296

Therefore, the constant growth rate is approximately 8.96% (to the nearest 0.01%).