Question

Home Canning Products common stock sells for $41.00 a share and has a market rate of return of 15.9 percent. The company just paid an annual dividend of $2.95 per share. What is the dividend growth rate?

Answer 1

This question requires application of constant growth dividend discount model according to which: Divi Po T-9 Po = Price of Stock Divi = Estimated Dividends for Next Period r = Required Rate of Return 9 = Growth Rate

Div1 = $2.95 * (1 + g)

$41 = \frac{2.95 * (1 + g)}{0.159 - g}$

6.519 - 41g = 2.95 + 2.95g

3.569 = 43.95g

g = 8.12%

Answer 2

ANSWER :

Given :

r = 15.9% = 0.159 

P₀ = 41 ($)

D₀ = 2.95 ($)

Let dividend growth rate be g.. 

So, 

D₁ = 2.95(1 + g) 

Now,

r = D1/P₀ + g

=> 0.159 = 2.95(1 + g) / 41 + g 

=> 0.159 = 2.95/41 + g (2.95/41 + 1) 

=> 0.159 = 0.072 + 1.072 g

=> g = (0.159 - 0.072) / 1.072

=> g = 0.08116

=> g = 8.116 % = 8.12 % approx.

So,

8.12% is the dividend growth rate. (ANSWER)