Llano's stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm's implied Hividend growth rate?
Llano's stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm's implied Hividend growth rate?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![**Llano's stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm's implied dividend growth rate?**
- 3%
- 5%
- 8%
- 10%
- 13%
This question addresses the concept of implied dividend growth rate, which is a key factor in financial analysis and equity valuation. The growth rate can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model):
\[ P = \frac{D_1}{r - g} \]
Where:
- \( P \) is the current stock price ($40.00),
- \( D_1 \) is the expected dividend ($2),
- \( r \) is the required return (13% or 0.13),
- \( g \) is the implied growth rate.
To find \( g \), rearrange the formula:
\[ g = r - \frac{D_1}{P} \]
This exercise prompts the reader to calculate the growth rate based on the given variables.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F537cca7c-787a-475d-9aba-926e9a602de3%2F552a5edc-c079-4254-89cc-b2cf5289de1b%2Fh1wpcd4_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Llano's stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm's implied dividend growth rate?**
- 3%
- 5%
- 8%
- 10%
- 13%
This question addresses the concept of implied dividend growth rate, which is a key factor in financial analysis and equity valuation. The growth rate can be calculated using the Gordon Growth Model (also known as the Dividend Discount Model):
\[ P = \frac{D_1}{r - g} \]
Where:
- \( P \) is the current stock price ($40.00),
- \( D_1 \) is the expected dividend ($2),
- \( r \) is the required return (13% or 0.13),
- \( g \) is the implied growth rate.
To find \( g \), rearrange the formula:
\[ g = r - \frac{D_1}{P} \]
This exercise prompts the reader to calculate the growth rate based on the given variables.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education