Question

Computer stocks currently provide an expected rate of return of 14%. MBI, a large computer company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the growth rate of MBI dividends? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Ke = 14% = 0,14

D1 = $3

Po = $60

Ke = D1/Po + g

0.14 = $3/$60 + g

0.14 = 0.05 +g

g = 0.14 - 0.05

g = 0.09 = 9%

Step-by-step explanation:

In this case, we need to apply cost of equity formula. Other values were provided with the exception of growth rate. Thus, we will make growth rate the subject of the formula. From the above calculation, the growth rate is 9%.