Question

The stock price of Webber Co. is $68. Investors require an 11 percent rate of return on similar stocks.

Required: If the company plans to pay a dividend of $3.85 next year, what growth rate is expected for the company’s stock price?

Answer 1

To get the growth rate, we will follow the Gordon Growth modelP= D/(K-G)whereP= stock value=$68D= Expected dividend=$3.85G= Growth rateK= required rate of returnG =K-(D/P)Substitute the given valuesG= 0.11-(3.85/68)
G= 5.34%The growth rate for stock required is 5.34%