Question

The Sisyphean Company's common stock is currently trading for $25.50 per share. The stock is expected to pay a $2.80 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 10%. If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to

Answer 1

0.98%

Step-by-step explanation:

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

the growth rate can be determined from the above equation

$25.50 = $2.8 / ( 0.1 -g)

Multiply both sides of the equation by 0.1 - g

$25.50( 0.1 -g) = $2.8

Divide both sides by $25.50

0.1 - g = 0.1098

g = 0.1 - 0.1098

g = - 0.0098

g = -0.98%