XYZ Corporation has just paid a dividend of 59 cents per share. The current market price of the share is $15 and shareholders require a return of 10 % pa. What is the annual growth rate (g) of the dividends? Answer as a percentage accurate to two decimal places. Do not enter the % sign.
Per the constant dividend growth model, the price | |
P0 = D0*(1+g)/(r-g), where | |
D0 = The last dividend paid | |
r = the required rate of return | |
g = growth rate | |
Substituting available values, we have | |
15 = 0.59*(1+g)/(0.10-g) | |
15/0.59 = (1+g)/(0.10-g) | |
(15/0.59)*(0.10-g) = 1+g | |
(15*0.10/0.59)-(15/0.59)*g = 1+g | |
(15*0.10/0.59)-1 = (1+15/0.59)*g | |
g = ((15*0.10/0.59)-1)/(1+15/0.59) = | 5.84% |
Answer: g = 5.84% | |
VERIFICATION: | |
P0 = 0.59*1.0584/(0.10-0.0584) = | $ 15.01 |
Almost: $15.00 |
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