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1. Alexis observes that the WRT Company just paid a dividend of $3.00 and that the...

1. Alexis observes that the WRT Company just paid a dividend of $3.00 and that the market price is $28.00. She believes that all future dividends will grow at a constant rate forever. If the appropriate discount rate is 14%, then the growth rate for this WRT Company stock must be _____%.

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Answer #1

Growth Rate for the WRT Company stock

As per the Constant Growth Model, the Value of the stock is calculated by using the following formula

Price of the Stock (P0) = D0(1 + g) / (Ke – g)

Here, we’ve Price of the Stock (P0) = $28.00 per share

Current Year Dividend (D0) = $3.00 per share

Required Rate of Return (Ke) = 14%

Therefore, the Price of the Stock (P0) = D0(1 + g) / (Ke – g)

$28.00 = $3.00(1 + g) / (0.14 – g)

$3.92 – 28g = $3.00 + 3g

$0.92 = 31g

g = 0.92 / 31

g = 0.0297 or

g = 2.97%

“Therefore, the Growth Rate for the WRT Company stock = 2.97%”

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