Question

Kennesaw Corp. is projected to pay a dividend of $2.8 one year from now. The common stock is currently selling for $34.50 and investors on aggregate require a 13% return. Assuming a constant dividend growth model, what is the growth rate of the dividend?

Answer 1

The dividend growth rate for Kennesaw Corp. is approximately 4.884%. This is calculated using the Gordon Growth Model and the given figures for stock price, required rate of return, and projected dividend.

Step-by-step explanation:

The question is asking for the dividend growth rate for Kennesaw Corp. stock using the constant dividend growth model. Given that the current stock price is $34.50, the required rate of return is 13%, and the projected dividend one year from now is $2.8, we can use the Gordon Growth Model to determine the growth rate. The Gordon Growth Model formula is:

P = D1 / (k - g)

Where:

• P is the current stock price.
• D1 is the expected dividend in one year.
• k is the required rate of return.
• g is the growth rate of the dividend.

Rearranging the formula to solve for g, we get:

g = k - (D1 / P)

Plugging the given numbers in, we have:

g = 0.13 - (2.8 / 34.50)

Calculating further, we find:

g = 0.13 - 0.08116 = 0.04884 or 4.884%

Therefore, the growth rate of the dividend for Kennesaw Corp. is approximately 4.884%.