Question

Shares of ABBO stock are currently selling for $14.43 a share. The last annual dividend paid was $1.61 a share, and dividends increase at a constant rate. If the market rate of return is 14 percent, what is the dividend growth rate

Answer 1

Growth rate = 2.56%

Step-by-step explanation:

Using the divided growth model

P = D× (1+g)/(ke-g)

P- price of stock, g- annual growth rate, Do- last dividend paid, Ke- market return

Substituting, we have

14.43 = 1.61(1+g)/(0.14-g)

cross multiplying

=14.43× (0.14-g) = 1.61 + 1.61g

2.0202- 14.43g = 1.61 + 1.61g

2.0202 -1.61 = 1.61g + 14.43g

0.4102 =16.04g

g = 0.025573566 × 100

Growth rate = 2.56%

Answer 2

The dividend growth rate is 3%

Step-by-step explanation:

Given that:

• Dividend : $1.61 (D)
• Price: $14.43 (P)
• Market rate of return: 14% = 0.14 (r)

As we know that, the formula to find the price of a stock is:

• P = D / (r - g)

In this question, we have:

14.43 = 1.61 / (0.14 -g)

<=> 0.14 - g = 1.61 / 14.43

<=> g = 0.14 - 0.11

<=> g = 0.03 = 3%

So the dividend growth rate is 3%