Question

please assist with resolving in excel

Based on the following data for the AAA stock, what is the implied growth rate? Assume that the stock is currently priced in equilibrium and that the dividend will grow at a constant rate. Last dividend per share: $5 Beta for the stock: 1.0 Risk free rate: 4% Market risk premium: 6% Current market price: $80

Select one: a. 4.62%

b. 4%

. 2.75%

d. 3.53%

e. 3%

Feedback The correct answer is: 3.53%

Answer 1

Required return on stock = Rf + [beta * (Rm - Rf)]

Ke = 4% + [1 * 6%]

Ke = 10%

Required return on stock = 10%

Growth rate (g) = Ke - [D0 * (1 + g) / P ]

g = 0.10 - [$5 *(1 + g) /$80

g = 0.10 - 0.0625*(1 + g)

g = 0.10 - 0.0625 - 0.0625g

1.0625 g = 0.0375

g = 0.0353

g = 3.53%

So, Growth rate = 3.53%