Question

Sains LTD shares are currently selling at $33 per share. The company is expected to pay a dividend of %2.32 per share next year. If the investor's required rate of return is 11.5% per year, estimate the company's growth rate. (Please explain the answer in detail, thank you)

Answer 1

As per Dividend Discount Model, the Price of the stock is calculated by using the following formula

Share Price = D1 / (Ke – g)

Where, Dividend in Next Year (D1) = $2.32 per share

Current selling price of the share (P0) = $33.00 per share

Required Rate of Return (Ke) = 11.50%

Growth Rate (g) = ?

Therefore, the Share Price = D1 / (Ke – g)

$33.00 = $2.32 / (0.1150 – g)

(0.1150 – g) = $2.32 / $33.00

(0.1150 – g) = 0.0703

g = 0.1150 – 0.0703

g = 0.0447

g = 4.47

“Therefore, the company's growth rate would be 4.47%”