Question

The XYZ Company, whose common stock is currently selling for $40 per share, is expected to pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return on XYZ is 14%, what growth rate in dividends must be expected?

A) 5%
B) 14%
C) 9%
D) 6%

Answer 1

Answer:

C) 9%

Explanation:

The computation of the expected growth rate in dividend is shown below:

As we know that

Current stock price= Next year dividend ÷ (Expected rate of return - growth rate in dividend)

$40 = ($2) ÷ (14% - growth rate in dividends )

5.6 - 40 × growth rate = 2

- 40 × growth rate = - 3.6

So, the growth rate in dividend is 9%