Question

Suppose GDL just paid a dividend of $4 and the required return on the stock is 13%. What constant growth rate must investors expect if the stock currently sells for $56

Answer 1

the growth rate is 5.47%

Step-by-step explanation:

The computation of the constant growth rate is shown below;

Current price = Dividend × (1 + growth rate) ÷ (required rate of return - growth rate)

$56 = $4 × (1 + growth rate) ÷ (13% - growth rate)

(1 + growth rate) ÷ (13% - growth rate) = 14

1 + growth rate = 1.82 - 14 × (growth rate)

So, the growth rate is

= 0.82 ÷ 15

= 5.47%

Hence, the growth rate is 5.47%