Given that the P/E ratio on a common stock is 15, the expected dividend payout ratio is 0.6, and the required rate of return is 19%, what is the dividend growth rate?
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The infinite period Dividend Discount Model claims that the current price of a common stock is equal to D1 / (k - g), where D1 is next period's (most often next year's) dividend, k is the required rate of return, and g is the growth rate of dividends. The earnings multiplier model goes a step further by dividing both sides of the infinite period Dividend Discount Model equation by expected earnings during the next 12 months, yielding P/E = (D1/E) / (k - g). Rearranging this results in g = k - (D1/E) / (P/E). In this question, the dividend growth rate is equal to 0.19 - 0.6/15 = 0.15 = 15%