Question

a share of stock is currently selling for $20.80. If the dividend just paid is $2.00 and investors are seeking a 14% return, what is the anticipated rate of constant growth?

Answer 1

Using the Gordon Growth Model, the anticipated rate of constant growth for a stock priced at $20.80 with a $2.00 dividend and a 14% required rate of return is calculated to be 4.38%.

Step-by-step explanation:

To answer the question about the anticipated rate of constant growth for a share of stock currently selling for $20.80 with a $2.00 dividend and investors seeking a 14% return, we use the Gordon Growth Model. This model is represented by the formula:

P = D / (k - g)

Where P is the price of the stock, D is the dividend, k is the required rate of return (14% in this case), and g is the growth rate we are trying to find. Rearranging the formula to solve for g gives us:

g = k - (D / P)

Plugging in the numbers:

g = 0.14 - (2.00 / 20.80) = 0.14 - 0.0962 = 0.0438 or 4.38%

The anticipated rate of constant growth is therefore 4.38%.