Question

Hot Teas common stock is currently selling for $41.04. The last annual dividend paid was $1.31 per share and the market rate of return is 11.2 percent. At what rate is the dividend growing

Answer 1

Answer: Growth rate = 7.76%

Explanation:

According to the Gordon growth model, the price of a stock is;

Price = ( Divided * ( 1 + growth rate)) / ( Return - growth rate)

41.04 = (1.31 * ( 1 + growth rate)) / ( 11.2% - growth rate)

41.04 * ( 11.2% - growth rate) = 1.31 + 1.31*growth rate

4.59648‬ - 41.04 * growth rate = 1.31 + 1.31*growth rate

1.31*growth rate + 41.04 * growth rate = 4.59648‬  - 1.31

42.35 * growth rate = ‭3.28648‬

Growth rate = ‭3.28648‬/ 42.35

Growth rate = 7.76%