Question

Gay manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (d1 = $1.25). the stock sells for $32.50 per share, and its required rate of return is 10.5%. the dividend is expected to grow at some constant rate, g, forever. what is the equilibrium expected growth rate

Answer 1

stock sold per share $32.50 Dividend per share $1.25 Return rate is 10.5% Percentage of Dividend for share is: 32.50* x/100 = 1.25 32.50 x = 1.25*100 x = 125/32.50 thus, x = 3.85 so Dividend percentage is 3.85% to find Growth rate, we have to reduce the dividend percentage from return rate percentage: = 10.5 - 3.85 = 6.65 The equilibrium expected growth rate is 6.65%