Question

CDB stock is currently priced at $82. The company will pay a dividend of $4.65 next year and investors require a return of 10.9 percent on similar stocks. What is the dividend growth rate on this stock?

a. 5.67%
b. 5.23%
c. 4.88%
d. 4.96%
e. 4.97%

Answer 1

b. 5.23%

Step-by-step explanation:

The computation of the dividend growth rate is shown below:

As we know that

Value of stock = Current year dividend ÷ (Required rate of return - growth rate)

$82 = $4.65 ÷ (0.109 growth rate)

$8.938 - 82 × growth rate = $4.65

82 × growth rate = 4.288

growth rate = 4.288 ÷ 82

= 5.23%

Hence, the dividend growth rate is 5.23%

Therefore the correct option is b.