Question

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.

Answer 1

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