Question

Shares of the Choco Co. common stock are currently selling for $25.48. The last dividend paid was $1.60 per share. The market rate of return is 10%. The rate at which the dividend is growing is closest to what value?

Select one:

a. 3.50%

b. 6.91%

c. 4.60%

d. 6.05%

e. 5.00%

Answer 1

Option (a) is correct

As per Gordon model, share price is given by:

Share price = D1 / k -g

where, D1 is next years' dividend, k is the required rate of return = 10% and g is the growth rate and

and Value of D1 is :

D1 = D0 * (1 + g), where D0 is last years' dividend

Now, putting the values in the above Gordon model formula, we get,

$25.48 = ($1.60 * (1+r) ) / 10% - g

$25.48 (10% - g) = $1.60 * (1 + g)

$2.548 - $25.48g = $1.60 + $1.60 g

$2.548 - $1.60 = $1.60 g + $25.48g

$0.948 = $27.08g

g = $0.948 / $27.08

g = 0.003500 or 3.5%