A stock is priced at $38.24 a share and has a market rate of return of 9.65 percent. What is the dividend growth rate if the company plans to pay an annual dividend of $.48 a share next year? Multiple Choice

a. 7.60 percent

b. 7.42 percent

c. 1.26 percent

d. 8.39 percent

e. 2.23 percent

Option (D) is correct.

Explanation:

Given that,

Stock price per share, P0 = $38.24

Market rate of return, rs = 9.65 percent

Annual dividend paid next year, D1 = $0.48

Dividend growth rate = [rs - (D1 : P0) ] * 100

= [9.65% - ($0.48 : $38.24) ] * 100

= (0.0965 - 0.0126) * 100

= 0.0839 or 8.39%