Question

The market price of a stock is

$21.69 and it just paid a dividend of $1.22. The required rate of
return is 11.79%. What is the expected growth rate of the
dividend?

Answer 1

Using the Gordon Growth Model, the expected growth rate of the dividend is computed by subtracting the dividend yield from the required rate of return, resulting in an expected growth rate of 6.16% for the stock's dividend.

Step-by-step explanation:

The question is asking to calculate the expected growth rate of the dividend. The Gordon Growth Model (also known as the Dividend Discount Model) can be used to find the expected growth rate when we have the market price, dividend, and required rate of return.

The formula derived from the Gordon Growth Model is:

Expected Growth Rate (g) = (Required Rate of Return (k) - Dividend Yield (D/P))

Where:

• D is the dividend paid, which is $1.22
• P is the market price, which is $21.69
• k is the required rate of return, which is 11.79%

Dividend Yield (D/P) is calculated as $1.22 / $21.69 = 0.0563 or 5.63%.

By plugging the values into the formula:

Expected Growth Rate (g) = 11.79% - 5.63%

The expected growth rate of the dividend is therefore 6.16%.