Question7 5 p Gray Manufacturing is expected to pay a divide

Question7 5 p Gray Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D1 $1.25). The stock sells for $27.50 per share, and its required rate of return is 1 1.6%. The dividend is expected to grow at some constant rate (g) forever. what is the expected growth rate? Your answer should be between 3.22 and 8.78, rounded to 2 decimal places, with no special charactens

Solution

Price of a stock using Constant dividend growth model is computed as follows -

P0 = D1 / (Ke - g)

where, P0 = stock price, D1 = expected dividend, Ke = required return, g = growth rate

$27.50 = $1.25 / (0.116 - g)

or, 0.116 - g = $1.25 / $27.50

or, 0.116 - g = 0.04545454545

or, g = 0.116 - 0.04545454545 = 0.07054545 or 7.05% (input as 7.05)