Question

Use the Constant Dividend Growth Model to determine the expected annual growth rate of the dividend for ELO stock. The firm is expected to pay an annual divided of $4.32 per share in one year. ELO shares are currently trading for $92.51 on the NYSE, and the expected annual rate of return for ELO shares is 9.82%. Answer as a % to 2 decimal places (e.g., 12.34% as 12.34).

Answer 1

Answer:  5.15%

Explanation:

The Constant Dividend Growth Model is used to calculate the price of a stock given the next dividend that will be paid on it, its required return and its constant growth rate by the formula;

Price = $\frac{Next Dividend}{Rate of Return - Growth rate}$

$92.51 = $\frac{4.32}{0.0982 - growth rate}$

9.084482‬ - 92.51g = 4.32

9.084482‬ - 4.32 = 92.51g

92.51g = 4.764482‬

g = 0.0515

g = 5.15%