Question

The market price of a stock is $22.47 and it just paid a

dividend of $1.77. The required rate of return is 11.80%. What is
the expected growth rate of the dividend?

Answer 1

To calculate the expected growth rate of the dividend based on the market price of the stock ($22.47), the dividend ($1.77), and the required rate of return (11.80%), you use the formula: Expected Growth Rate = Required Rate of Return - Dividend Yield. The calculated expected growth rate is 3.92%.

Step-by-step explanation:

The student is asking about calculating the expected growth rate of a stock's dividend based on its current market price, dividend payment, and the required rate of return. This is commonly addressed using the Gordon Growth Model (also known as the Dividend Discount Model), which calculates the expected growth rate of a company's dividends per share.

To find the expected growth rate, we use the formula:

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

Where:

• Dividend Yield = Dividend per Share / Price per Share
• The required Rate of Return is the return an investor requires, given the risk of the investment
• Expected Growth Rate is the rate at which dividends are expected to grow

Given the market price of the stock ($22.47), the dividend paid ($1.77), and the required rate of return (11.80%), we can calculate the expected growth rate:

Dividend Yield = $1.77 / $22.47 = 0.0788 or 7.88%

Expected Growth Rate (g) = 11.80% - 7.88% = 3.92%

Therefore, the expected dividend growth rate is 3.92%.