The market price of a stock is $21.15 and it just paid a dividend of $1.36. The required rate of return is 11.46%. What is the expected growth rate of the dividend?



To determine the expected growth rate of the dividend, we can use the Gordon Growth Model (Dividend Discount Model), which states:

\[
P = \frac{D_1}{r - g}
\]

Where:
- $ P $ is the current stock price,
- $ D_1 $ is the expected dividend next year,
- $ r $ is the required rate of return, and
- $ g $ is the dividend growth rate we want to find.

Since the stock just paid a dividend ($ D_0 $) of $1.36, we can calculate $ D_1 $ as follows:

\[
D_1 = D_0 \times (1 + g)
\]

Substitute $ D_1 = 1.36 \times (1 + g) $ into the Gordon Growth Model:

\[
21.15 = \frac{1.36 \times (1 + g)}{0.1146 - g}
\]

Now, we can solve this equation for $ g $ (the growth rate of the dividend). 

Let's proceed with the calculation:The expected growth rate of the dividend, $ g $, is approximately **4.73%**.

Would you like more details on the solution, or do you have any questions?

Here are some related questions for practice:
1. What happens to the growth rate if the required rate of return increases?
2. How would the stock price change if the expected growth rate was higher?
3. If the dividend just paid was $1.50, what would be the new expected growth rate?
4. How can the Gordon Growth Model be modified if dividends are not expected to grow?
5. How is the required rate of return determined for a stock?

**Tip:** The Gordon Growth Model works best for stable, dividend-paying stocks with predictable growth.

The market price of a stock is $21.15 and it just paid a dividend of $1.36. The required rate of return is 11.46%. What is the expected growth rate of the dividend?

Learn how to calculate the expected growth rate of a dividend using the Gordon Growth Model. With a stock price of $21.15, a dividend of $1.36, and a required return of 11.46%, discover step-by-step how to solve for the dividend growth rate. Ideal for college-level finance and business studies.

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