Question

What is the expected constant growth rate of dividends for a stock currently priced at Php 50, that is expected to pay a dividend of Php 5 next year, and has a required return of 20%?

Answer 1

Answer: 10%

Explanation:

Using the Gordon Growth Model, the price of a stock can be calculated as follows:

Price = Next dividend / (Required return - growth rate)

Notice that we are provided with all the figures in the formula above except the growth rate so we can calculate the growth rate with these figures:

50 = 5 / (20% - growth rate)

50 * (20% - growth rate) = 5

20% - growth rate = 5 / 50

-growth rate = 10% - 20%

-Growth rate / -1 = -10% / -1

Growth rate = 10%