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10 June, 07:20

Taggart transcontinental has a dividend yield of 2.5%. Taggarts equity cost of capital is 10% and its dividends are expected to grow at a constant rate. Based on this information taggarts constant growth rate in dividends is closest to:

A) 5%

B) 2.5%

C) 10%

D) 7.5%

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Answers (1)
  1. 10 June, 11:15
    0
    D) 7.5%

    Step-by-step explanation:

    Using dividend growth model,

    Price, P = D / (r - g)

    where, D = Dividend, r = cost of equity = 10%, and g = growth rate

    we know that

    => r - g = D / P = Dividend yield = 2.5%

    => Growth rate, g = 10% - 2.5% = 7.5%

    therefore the constant growth rate in dividends is closest to = 7.5%
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