Question

What is the implied growth rate of the Federal Express dividend based on the constant growth dividend discount model? Assume the Johnsons’ required rate of return is 11.4% and the price is 5000 for 100 shares. Current dividend is 3.40, show your steps

Hint: V = D1/(r - g) D1 = D0(1+g) Solving for g

Answer 1

The implied growth rate of the Federal Express dividend based on the constant growth dividend discount model is approximately -11.332%.

Step-by-step explanation:

To calculate the implied growth rate of the Federal Express dividend using the constant growth dividend discount model, we can use the formula:

V = D1 / (r - g)

Where V is the price of the stock, D1 is the expected dividend at the next time period, r is the required rate of return, and g is the growth rate of the dividend. Rearranging the formula to solve for g, we have:

g = (D1 / V) - (r)

Plugging in the given values, we have D1 = current dividend = $3.40, V = price = $5000, and r = required rate of return = 11.4% = 0.114 in decimal form. Substituting these values into the formula, we get:

g = (3.40 / 5000) - (0.114) = 0.00068 - 0.114 = -0.11332

The implied growth rate of the Federal Express dividend is approximately -11.332%.