Question

The stock price of Baskett Co. is $53.40. Investors require a return of 12 percent on similar stocks. If the company plans to pay a dividend of $3.35 next year, what growth rate is expected for the company’s stock price? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Growth rate %

Answer 1

Answer:

Growth Rate = 5.73%

Explanation:

The present value of stock formula can be used here to solve this problem.

The formula is:

$P_0=\frac{Div_1}{r-g}$

Where

$P_0$  is the current stock price

$Div_1$  is the dividend to be paid next year

r is the rate of return required

g is the growth rate expected

Now, the first 3 variables are given, we need to find g. Substituting, we find our answer:

$P_0=\frac{Div_1}{r-g}\\53.40=\frac{3.35}{0.12-g}\\53.40(0.12-g)=3.35\\6.408-53.40g=3.35\\53.40g=3.058\\g=0.0573$

In percentage, it is

Growth Rate = 5.73%