Question

Jimbo 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 $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

A. 4.36%

B. 5.65%

C. 6.65%

D. 7.25%

E. 8.55%

Answer 1

Expected Dividend(D1) $1.25

Stock Price = $32.50

Rate of retrun = 10.50%

Dividend Yield = 3.85%(=1.25/32.50)

Equilibrium Expected Growth Rate = rs - D1/Po

                                                                = 10.50% -1.25/32.50

                                                                = 6.65%

Therefore, option C is correct .