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
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**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.
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.
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