Question

What dividend growth rate would be required to produce a cost of equity capital of 14% when the common stock price is $153 per share and the dividend is $3.79 per share?

The dividend growth rate is ___%

Answer 1

Solution:-

Let us assume "g" be the dividend growth rate

As per DDM,

            Price of share = Dividend*(1+growth rate)/(cost of equity-Growth rate)

Where ,

Price of share = $153

Dividend = $3,79

g= Growth rate = ?

Cost of equity= 14%

Substituting the value we get :-

            $153 = $3.79*(1+g)/(0.14-g)

or, 153*(0.14-g)=3.79*(1+g)

or, 21.42-153g=3.79+3.79g

or 153g+3.79g=21.42-3.79

or g =17.63/156.79

    g = 0.112443 i.e. 11.24%

Hence the dividend growth rate = 11.24%

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