Question

The price of a stock is now $150. the required rate of return is 13%. the stock s expected to not pay any dividends next two years. after that, it is expected to pay a dividend of $10. after that dividends are expected to grow at a constant rate, what is the expected constant dividend growth rate?

Answer 1

The expected constant dividend growth rate can be calculated using the Gordon Growth Model, which takes into account the return on equity and the retention ratio. However, the question does not provide these values, so an exact calculation is not possible.

Step-by-step explanation:

The expected constant dividend growth rate can be calculated using the Gordon Growth Model. According to the model, the dividend growth rate is equal to the return on equity multiplied by the retention ratio (1 minus the dividend payout ratio). In this case, since the stock is not expected to pay any dividends in the next two years, we can start calculating the growth rate from the third year when the dividend of $10 is expected to be paid.

The dividend growth rate can be calculated as follows:

Growth Rate = Return on Equity x Retention Ratio

Since we don't have the return on equity and retention ratio given in the question, we cannot calculate the exact dividend growth rate. However, you can use the formula and plug in the provided values to find the answer.