uestiTOn LO 2 points A stock is trading at 4400 per share T

uestiTOn LO (2 points) A stock is trading at $ 44.00 per share. The stock is expected to have a year end dividend of $ 2.2 0 per share (D)), which is expected to grow at some constant rate g throughout time. The stock\'s required rate of return is 12 percent If you are an analyst who believes in efficient markets, what is your forecast of g? Answer in a percentage without the % sign, and round it to two decimal places ie 10.54 for 10.54% (or 0 1054)

Solution

Assuming efficient markets, Gordon growth model would be used here. So, the formula is

Value/value of a dividend stock = Stock\'s next annual dividend / (Required return - Dividend growth rate)

putting the values in the above equation we would get

44$ = $2.2/(0.12-g)

which can be written as

44*0.12 - 44g = 2.2

5.28 - 44g = 2.2

44g = 5.28-2.2

44g = 3.08

g = 3.08/44

g = 0.07 or 7%

Plugging back 7% in the above equation should give us 44$; This is kind of a cross verification that the answer is correct