The stock price of Webber Co. is $68. Investors require an 11 percent rate of return on similar stocks.
Required:
If the company plans to pay a dividend of $3.85 next year, what growth rate is expected for the company’s stock price?
.11*68 = 7.48
7.48 - 3.85 = 3.63 expected increase in price
3.63 = x (68)
x = .0533 or 5.3%
5.3%
To calculate the expected growth rate for the company's stock price, we can use the Gordon Growth Model.
The Gordon Growth Model formula is:
Current Stock Price = Dividend / (Required Rate of Return - Dividend Growth Rate)
Given:
Current Stock Price: $68
Dividend: $3.85
Required Rate of Return: 11%
Let's plug in the values into the formula and calculate the growth rate:
$68 = $3.85 / (0.11 - Growth Rate)
Rearranging the equation:
(0.11 - Growth Rate) = $3.85 / $68
0.11 - Growth Rate = 0.0566176470588235
Subtracting 0.11 from both sides:
Growth Rate = 0.11 - 0.0566176470588235
Growth Rate ≈ 0.0534
Therefore, the expected growth rate for the company's stock price is approximately 5.34%.
To determine the expected growth rate for the company's stock price, we can use the Gordon Growth Model, also known as the Dividend Discount Model (DDM). The Gordon Growth Model is given by the formula:
Stock Price = Dividend / (Required Rate of Return - Expected Growth Rate)
In this case, we have the following information:
- Stock Price = $68
- Dividend = $3.85
- Required Rate of Return = 11 percent or 0.11
- Expected Growth Rate = ?
Using the Gordon Growth Model formula, we can rearrange it to solve for the expected growth rate:
Expected Growth Rate = (Dividend / Stock Price) - Required Rate of Return
Plugging in the given values, we get:
Expected Growth Rate = ($3.85 / $68) - 0.11
Performing the calculation:
Expected Growth Rate ≈ 0.0566 - 0.11
Expected Growth Rate ≈ -0.0534
Therefore, the expected growth rate for the company's stock price is approximately -0.0534, which implies a negative growth rate. This might indicate that investors expect the stock price to decrease rather than increase.