The Sisyphean Company's common stock is currently trading for $25.50 per share. The stock is expected to pay a $2.80 dividend at the end of the year and the Sisyphean Company's equity cost of capital (i. e., r) is 10%. What is the expected growth rate in the company's dividends

The answer is given below;

Explanation:

P=D (1+g) / (r-g)

P=$25.5

r=10%

D=$2.8

g=?

P=D (1+g0 / (r-g)

25.5=2.8 (1+g) / (.1-g)

25.5=2.8+2.8g / (.1-g)

25.5 (.1-g) = 2.8+2.8g

2.55-25.5g=2.8+2.8g

2.8-2.55=-25.5g-2.8g

-28.3g=.25

g=-.88%

-0.98%.

Explanation:

The Gordon Constant Growth Model will be used to find out the growth rate of the company's dividends. This model is used to value stocks of companies growing at a constant rate. The equation of this model is:

Po = d1 / (r - g)

where

Po = Current Market Price of Stock

d1 = Dividend of Next Year or This Year End

r = Cost of Equity

g = growth rate of dividends

Simply re-arrange the equation for "g";

⇒ g = r - (d1 / Po)

OR g = 0.1 - (2.80 / 25.50) = - 0.98%.