Question

the franlkin corpoation is expexted to pay a dividend of 1.01 per share at the end of the year the stock sells for 64.39 per shar required rate return is 7.75% what is the equiliburm growth rate

Answer 1

The equilibrium growth rate is 6.18%.

Step-by-step explanation:

This is calculated by using the Gordon growth model (GGM) formula which is based on the assumption that dividend growth rate will be stable year after year forever. The formula is as follows:

P = d / (r - g) ……………………………………… (1)

Where;

P = current share price = 64.39

d = expected dividend = 1.01

r = required return = 7.75%, or 0.0775

g = equilibrium growth rate = ?

Substituting the values into equation (1) and solve for g, we have:

64.39 = 1.01 / (0.0775 - g)

64.39(0.0775 - g) = 1.01

4.990225 - 64.39g = 1.01

4.990225 - 1.01 = 64.39g

3.980225 = 64.39g

g = 3.980225 / 64.39

g = 0.0618143345239944, or 6.18143345239944%

Rounding to 2 decimal places, we have:

g = 6.18%

Therefore, the equilibrium growth rate is 6.18%.