Question

Berg Inc. has just paid a dividend of $2.00 and is now selling for $48 per share. Similar stocks generally earn a 12.5% return. assuming that Berg Inc. is a constant growth stock,what is its expected rate of growth?

Answer 1

Berg Inc. is expected to have a growth rate of 8.33% based on the Gordon Growth Model, using the given dividend payment of $2.00, stock price of $48, and required return of 12.5%.

Step-by-step explanation:

To calculate the expected rate of growth for Berg Inc., we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula for calculating the expected growth rate (g) is derived from the model's formula:

P = D / (k - g)

where:

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

Given that Berg Inc. just paid a dividend (D) of $2.00, the current stock price (P) is $48, and similar stocks have a required rate of return (k) of 12.5%, we can rearrange the formula to solve for g:

g = k - (D / P)

So, the expected growth rate will be:

g = 0.125 - ($2 / $48)

g = 0.125 - 0.0417

g = 0.0833 or 8.33%

Thus, the expected rate of growth for Berg Inc. is 8.33%.