Question

The stock price of Alps Co. is $54.60. Investors require a return of 12 percent on similar stocks. If the company plans to pay a dividend of $3.95 next year, what growth rate is expected for the company's stock price?

Answer 1

The expected growth rate for Alps Co.'s stock price, using the dividend discount model, is calculated to be 4.77%.

Step-by-step explanation:

The student's question involves calculating the expected growth rate of a company's stock price, given its dividend payout and the required rate of return by investors. This is a scenario from finance that can be approached using the Gordon Growth Model, which relates the price of stock, expected dividend, required rate of return, and growth rate of dividends.

To find the expected growth rate (g), we use the formula P = D1 / (r - g), where P is the current stock price, D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate of dividends we need to solve for. Rearranging the formula gives us g = r - (D1 / P).

Plugging in the given values:

• P = $54.60 (current stock price)
• D1 = $3.95 (expected dividend next year)
• r = 0.12 (required return of 12%)

The growth rate (g) can be calculated as follows:

g = 0.12 - ($3.95 / $54.60)

g = 0.12 - 0.0723

g = 0.0477 or 4.77%

Therefore, the expected growth rate for Alps Co.'s stock price is 4.77%.