Given that the correct value of a common stock is $43, the required rate of return on the stock is 17%, and next period's dividend will be $4.50, using the infinite period Dividend Discount Model, what is the growth rate of dividends?
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A. B. C. D. E.C
The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. Rearranging this yields g = k - D1/(current value). In this question, the dividend growth rate is equal to
0.17 - (4.5 / 43) = 0.065 = 6.5%.