Question

Use the Constant Dividend Growth Model to determine the expected annual growth rate of the dividend...

Use the Constant Dividend Growth Model to determine the expected annual growth rate of the dividend for ELO stock. The firm is expected to pay an annual divided of $15.85 per share in one year. ELO shares are currently trading for $238.35 on the NYSE, and the expected annual rate of return for ELO shares is 11.11%. Answer as a % to 2 decimal places (e.g., 12.34% as 12.34).

Homework Answers

Answer #1

Given:

Expected annual dividend in one year (D1)= $15.85 per share
Currently trading Price (Po) = $238.35
Expected annual rate of return (ke) = 11.11%

Calculation of expected annual growth rate of the dividend for ELO stock

Constant Dividend Growth Model Formula  

Po = D1 / (Ke - g)

Where, Po = Current Price
D1 = Dividend next year
ke = Required rate of Return
g = Dividend Growth rate

$238.35 =  $15.85 ( 0.1111 - g)
238.35(0.1111 - g) = 15.85
26.480685 - 238.35g = 15.85
238.35g = 10.630685
g = 0.044601 or 4.46%

Expected annual growth rate of the dividend for ELO stock = 4.46%

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