Question

Hyperion Manufacturing is expected to pay a dividend of $2.25 per share at the end of the year. The stock sells for $75 per share, and its required rate of return is 12%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate

Answer 1

The equilibrium expected growth rate is 9%

Step-by-step explanation:

Stock Price = Expected Dividend next year / (Required Return - Growth rate)

75 = 2.25/( 12% - growth rate)

75 * ( 12% - growth rate) = 2.25

75 * ( 0.12 - growth rate) = 2.25

9 - 75 * Growth rate = 2.25

9 - 2.25 = 75 * growth rate

6.75 = 75 * growth rate

Growth rate = 6.75 /75

Growth rate = 0.09

Growth rate = 9%