Question

You purchased a stock when the last paid dividend was $3.00.

What was the growth rate of dividends if you required a 9% return
for the purchase, assumed a constant rate of growth, and paid
$78.75 for

Answer 1

The growth rate of dividends is approximately -0.97.

Step-by-step explanation:

To find the growth rate of dividends, we can use the Gordon Growth Model formula: D1 = D0(1 + g), where D1 is the next dividend, D0 is the current dividend, and g is the growth rate. We can rearrange the formula to solve for g: g = (D1/D0) - 1. In this case, the next dividend (D1) is not given, but we are given the required return (r) and the current dividend (D0). We can use the formula D0(1 + g) = r to solve for g:

D0(1 + g) = r

(D0 + D0g) = r

D0g = r - D0

g = (r - D0) / D0

Plugging in the given values:

g = (0.09 - 3) / 3

g = -2.91 / 3

g ≈ -0.97