Question

The dividends of CMC Ltd are expected to grow at a constant annual rate over the foreseeable future. The company has recently paid a dividend per share of $1.00, and the required rate of return on the shares is 10% p.a. Based on this information, the current price of the shares has been estimated at $25.00. The constant annual growth rate in dividends that is implied by this information is closest to:

Answer 1

As per dividend discount model,
Current Share Price	=	D0*(1+g)/(Ke-g)			Where,
$25.00	=	1.00*(1+g)/(0.10-g)			D0	=	Last dividend	=	$1.00
25.00*(0.10-g)	=	1.00*(1+g)			g	=	Growth rate	=	?
2.50-25g	=	1.00+g			Ke	=	Required return	=	10%
2.50-1.00	=	25g+g
1.50	=	26g
0.0577	=	g
So,
Constant growth rate in dividend is 5.77%.