Question

McKenna Motors is expected to pay a $1 per-share dividend at the end of the year (D1=$1 ). The stock sells for $26 per share and its required rate of return is 5.8 percent. The dividend is expected to grow at a constant rate, g, forever. What is the growth rate, g, for this stock?

A.1.85%
B.2.15%
C.1.95%
D.1.75%
E.2.05%

Answer 1

The growth rate for this stock is approximately 1.92%. Option C, 1.95%, is the closest answer choice.

Step-by-step explanation:

To calculate the growth rate, g, for this stock, we can use the Gordon Growth Model formula. According to the formula, the growth rate (g) can be calculated as the dividend per share (D1) multiplied by the growth rate (g) divided by the required rate of return (r). Therefore, we can rearrange the formula to solve for the growth rate:

g = (D1 / stock price) / r

Substituting the given values into the formula, we have:

g = (1 / 26) / 0.058 = 0.0192 = 1.92%

Therefore, the growth rate (g) for this stock is 1.92%, which is closest to option C: 1.95%.