Question

The stock of Music City Inc. is selling for $37.50. The firm recently paid a dividend of $1.10. What is its implied constant growth rate if the market return is 14 percent?

Answer 1

The implied constant growth rate of Music City Inc. is -11.07%.

Step-by-step explanation:

To find the implied constant growth rate, we can use the Gordon Growth Model, which states that the price of a stock is equal to its dividend divided by the difference between the required rate of return and the growth rate. In this case, the dividend is $1.10 and the market return is 14 percent. Let's calculate the growth rate:

1. Divide the dividend by the stock price: $1.10 / $37.50 = 0.0293
2. Subtract the market return from the result: 0.0293 - 0.14 = -0.1107

The implied constant growth rate is -0.1107 or -11.07%. This negative growth rate suggests that the market is expecting a decline in the future dividends of Music City Inc.