Question

The common stock of Darkover Inc. just paid an annual dividend of $1.00. The dividend is expected to grow at a constant rate forever. The required rate of return for this stock is 12.8 percent. If the current price of the stock is $ 50.44 what is the expected growth rate of the dividends? Give your answer to the nearest .1%.

Answer 1

Using the Gordon Growth Model, the expected growth rate of the dividends for Darkover Inc. is calculated to be 10.8% to the nearest 0.1%.

Step-by-step explanation:

The expected growth rate of the dividends for Darkover Inc. can be calculated using the Gordon Growth Model, which is represented by the formula:

P = D / (r - g)

Where:

• P is the current stock price
• D is the dividend just paid
• r is the required rate of return
• g is the growth rate of the dividends

We can rearrange the formula to solve for the growth rate (g) as follows:

g = r - (D / P)

Given that:

• The annual dividend (D) is $1.00
• The required rate of return (r) is 12.8%
• The current stock price (P) is $50.44

By substituting the values:

g = 0.128 - (1 / 50.44)

g = 0.128 - 0.0198

g = 0.1082 or 10.82%

Therefore, the expected growth rate of the dividends is 10.8% to the nearest 0.1%.