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Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Respuesta :

TomShelby

Answer:

g = 6.65%

Explanation:

We solve using the dividend grow model:

[tex]\frac{divends}{return-growth} = Intrinsic \: Value[/tex]

D1 1.25

Value 32.5

return 10.5% = 0.105

[tex]\frac{1.25}{0.105-g} = 32.5[/tex]

[tex]\frac{1.25}{32.5} = 0.105-g[/tex]

[tex]g = 0.105 - \frac{1.25}{32.5}[/tex]

g = 0.06654 = 6.65%

hoangkhangpham94

Answer:

The equilibrium dividend expected growth rate is 6.654%.

Explanation:

We apply the formula for finding the present value of growing perpetuity to find the equilibrium dividend expected growth rate, which is denoted as X.

At dividend expected growth rate X and required rate of return 10.50%, the present value of the dividend stream will be equal to its selling price per share, so X's calculation is as below:

1.25/(10.5% - X) = 32.5 <=> 10.5% - X = 1/26 <=> X = 6.654%.

So, the answer is 6.654%.

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