Question

A manufacturing company is expected to pay a dividend of br. 1.25 per share at the end of the year (D1=br.1.25). The stock sells for br. 32.50 per share and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate forever. What is the growth rate

Answer 1

Answer:

the equilibrium expected growth rate is 6.65%

Step by step Explanation:

We were given stock sold per share of $32.50

Dividend per share =$1.25

Required Return rate = 10.5%

Then we can calculate Percentage of Dividend for share as;

dividend of br. 1.25 per share at the end of the year (D1=br.1.25)

= 1.25×100= 125

Let the dividend percentage = y

stock sold per share × y= 125

125= 32.50y

y = 125/32.50

y= 3.85

y= 3.85*100%

Then the Dividend percentage = 3.85%

Growth rate=(required rate of return -Dividend percentage)

= 10.5 - 3.85 = 6.65

Therefore, the equilibrium expected growth rate is 6.65%