Question

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?A) 11.43 percent.B) 11.06 percent.C) 10.87 percent.D) 11.18 percent.E) 10.95 percent.

Answer 1

Answer:

E) 10.95%

Explanation:

Hi, in order to find the "g" or growth rate of this common stock, we need to solve the following equation.

$P=\frac{Do(1+g)}{r-g}$

Where:

P = Price

g = growth rate

r = market rate of return

Do = last dividend

So, we solve like this

$P(r-g)=Do(1+g)$

$P*r-P*g=Do+Do*g$

$P*r-Do=Do*g+P*g$

$P*r-Do=g(Do+P)$

$\frac{P*r-Do}{Do+P} =g$

And now we will have to work with its equivalent numbers

$\frac{36.84*0.158-1.61}{1.61+36.84} =g$

So, g = 10.95%

Best of luck.