Question

Xytex Products just paid a dividend of $2.27 per share, and the stock currently sells for $32. If the discount rate is 15 percent, what is the dividend growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Growth rate

Answer 1

g = 0.0738255 or 7.38255% rounded off to 7.38%

Step-by-step explanation:

Using the constant growth model of dividend discount model, we can calculate the price of the stock today. The DDM values a stock based on the present value of the expected future dividends from the stock. The formula for price today under this model is,

P0 = D0 * (1+g) / (r - g)

Where,

• D0 * (1+g) is dividend expected for the next period /year

• g is the growth rate

• r is the required rate of return or cost of equity

Plugging in the values of P0, D0 and r in the formula, we can calculate the value of g to be,

32 = 2.27 * (1+g) / (0.15 - g)

32 * (0.15 - g) = 2.27 + 2.27g

4.8 - 32g = 2.27 + 2.27g

4.8 - 2.27 = 2.27g + 32g

2.53 = 34.27g

g = 2.53 / 34.27

g = 0.0738255 or 7.38255% rounded off to 7.38%