Question

Home Products common stock sells for $32.90 a share and has a

market rate of return of 12.4 percent. The company just paid an
annual dividend of $2.71 per share. What is the dividend growth
rate?

Answer 1

Step-by-step explanation:

To calculate the dividend growth rate, we can use the dividend discount model formula, which is based on the market rate of return, the current stock price, and the most recent dividend payment.

Dividend Growth Rate (g) = (Dividend per Share / Current Stock Price) - Rate of Return

Given:

Current Stock Price = $32.90

Market Rate of Return = 12.4% = 0.124

Annual Dividend per Share = $2.71

Dividend Growth Rate (g) = ($2.71 / $32.90) - 0.124

Dividend Growth Rate (g) = 0.0824 - 0.124

Dividend Growth Rate (g) ≈ -0.0416

The dividend growth rate is approximately -0.0416 or -4.16%. The negative sign indicates that the dividend is decreasing over time rather than growing.