Question

how we get 7.0 , which is the growth rate.

Questions 18B-19B are based on the information that follows. A firm grows its dividends at constant rate of g% per year. Current stock price is $68.09. Required cost of capital is 12.5% and the current dividend just paid is $3.50. 18B. What is the growth rate of the dividend? (a) 8.50% (b) 7.70% (c) 8.76% • (d) 7.0% (e) 5.00%

Answer 1

P0 = D0*(1+g) / ( r - g )
Here,
P0 = Current value of stock = 68.09
D0 = Current dividend = 3.50
g = Growth rate
r = Required cost of capital = 12.5%
Now let us put these figures in the above equation to find out required return.
68.09 = 3.50*(1+g) / (12.5%-g)
68.09 / 3.50 = (1+g) / (12.5%-g)
19.45 = (1+g) / (12.5%-g)
19.45*(12.5%-g) = (1+g)
(19.45*12.5%)-19.45g = (1+g)
2.43 - 19.45g = 1+g
g + 19.45g = 2.43 - 1
20.45g = 1.43
g = 1.43/20.45	7.0%