Question

Luther industries has a dividend yield of 4.5% and a cost of equity capital of 10%. luther industries' dividends are expected to grow at a constant rate indefinitely. the growth rate of luther's dividends is closest to ________.

Answer 1

A) 5.5%

A) rE = Div1 / P0 + g
0.1 = 0.045 + g, so g = 5.5%

Answer 2

Answer:

5.5%

Explanation:

GIven that:

Luther industries has a dividend yield = 4.5%;        &

The cost of equity capital which is the required rate of return of shareholders = 10%

The growth rate of Luther's dividends is the percentage growth rate of  Luther's dividends over a certain period of time which is can be calculated by the difference in the cost of equity capital and the dividend yield.

∴

growth rate of Luther's dividends =  = (10 - 4.5 )%

= 5.5%