Question

"The common stock of One Community Bank is currently selling for $30. The last annual dividend paid was $1.25 per share and the required rate of return is 12.5 percent. What is the dividend growth rate

Answer 1

Answer:

The dividend growth rate is 8%.

Explanation:

Considering the stock is the one that has a constant dividend growth, we use the DDM approach for constant growth model. The constant growth model formula for price of a stock today is,

P0 = D1 / r - g

Where,

• D1 is the dividend in the next period or D0 * (1 + g)
• r is the required rate of return
• g is the growth rate in dividends

Plugging in the available value,

30 = 1.25 ( 1+g) / (0.125 - g)

30 * (0.125 - g) = 1.25 + 1.25g

3.75 - 30g = 1.25 + 1.25g

3.75 - 1.25 = 30g + 1.25g

2.5 / 31.25 = g

g = 0.08 or 8%