Question

A stock is selling for $37.50 and is expected to pay a dividend of $3 at the end of the year. If investors expect a return of 14%, what must be the sustainable growth rate

Answer 1

Growth rate is 6%

Step-by-step explanation:

Given SP = $37.5, D1 = $3, R = 14% g = ?

SP = D1/ r-g

so from the dividend discount model we have to solve for g we get

37.5 = 3/0.14-g

37.5(0.14-g)=3

37.5(0.14-g)/37.5 =3/37.5

0.14 - g = 0.08

g= 0.14-0.08

=0.06/6%

Answer 2

6%

Step-by-step explanation:

Well this can be simply calculated by the formula i.e: P = D / r-g .

Here we have P, D and r, we have to find g.

Hence the formula becomes as:

g = 0.14 - (3 / 37.5)

g = 0.06 ~ 6%.

Hope this helps you. Good luck and Cheers.