Question

The stock price of Alps Co. is $53.40. Investors require a return of 12 percent on similar stocks.

If the company plans to pay a dividend of $3.35 next year, what growth rate is expected for the company’s stock price?

Answer 1

To determine the expected growth rate for the company's stock price, we can use the dividend discount model (DDM). By rearranging the DDM formula and substituting the given values, we find that the expected growth rate is approximately 6.26%.

Step-by-step explanation:

To determine the growth rate expected for the company's stock price, we can use the dividend discount model (DDM). The DDM states that the stock price is equal to the present value of all expected future dividends. In this case, the dividend next year is $3.35. We can calculate the expected stock price using the formula:

Stock Price = Dividend / (Required Return - Growth Rate)

Given that the stock price is $53.40 and the required return is 12 percent, we can rearrange the formula to solve for the growth rate:

Growth Rate = (Dividend / Stock Price) - (1 / Required Return)

Substituting the values, we get:

Growth Rate = ($3.35 / $53.40) - (1 / 0.12)

Growth Rate ≈ 0.0626, or 6.26%