Gray 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 $27.50 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?

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Business

Eva Hayes

4 March, 14:18

Gray 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 $27.50 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?

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Noelle Fitzgerald · Answer 1

5.95%.

Explanation:

Expected dividend (D1) $1.25

Stock price $27.50

Required return 10.5%

Dividend yield 4.55%

Growth rate = rS - D1/P0 = 5.95%.