Constant growth unknown r Yesterday Tyrell Corp paid its ann

Constant growth unknown r

Yesterday Tyrell Corp paid its annual dividend of $4.90 per share and today you wish to purchase the stock at today’s quoted price of $58.28 . You believe that the dividend growth rate is 8.7%. According to the dividend growth model, what is this stock\'s total expected rate of return?

Solution

Expected rate of return (r) using constant dividend growth model can be computed as -

r = [ D0 x (1 + g) / P0 ] + g

where, D0 = last dividend paid, g = growth rate, P0 = stock price today

r = [ $4.90 x (1 + 0.087) / $58.28 ] + 0.087 = 0.178391558 or 17.84%