Question

A company has an expected dividend (D1) of 1.25, a stock price of 27.50, a required return of 10.5, and a dividend yield of 4.55. The growth rate can be calculated using the formula rS - D1/P0 = 5.95. What is the growth rate?

1) 5.95
2) 4.55
3) 10.5
4) 1.25

Answer 1

The growth rate is calculated using the corrected Gordon Growth Model as 5.95%, which is not one of the options provided in the question. The formula in the question appears to have a typo, and after correcting it, we find the growth rate not matching the options given.

Step-by-step explanation:

The growth rate can be calculated using the provided dividend pricing model formula: rS - D1/P0 = 5.95, where rS is the required return, D1 is the expected dividend, and P0 is the stock price. With an expected dividend (D1) of $1.25, a stock price (P0) of $27.50, and a required return (rS) of 10.5%, we can calculate the growth rate.

However, there appears to be a typo in the formula and it should be the Gordon Growth Model which is rS = D1/P0 + g where g is the growth rate. From this formula, we can rearrange to find the growth rate (g) as g = rS - (D1/P0). Substituting the given values, we find the growth rate as g = 0.105 - (1.25/27.50), which simplifies to g = 0.105 - 0.04545. Therefore, the growth rate is approximately 5.95% which is not one of the provided options. There seems to be a confusion in the options provided considering the formula given in the question.