McDonnell Manufacturing isexpected to pay a dividend of $1.50 per share at the e
ID: 2770543 • Letter: M
Question
McDonnell Manufacturing isexpected to pay a dividend of $1.50 per share at the end of theyear (D1 = $1.50). The stock sells for $34.50 per share,and its required rate of return is 11.5%. The dividend is expectedto grow at some constant rate, g, forever. What is the equilibriumexpected growth rate? McDonnell Manufacturing isexpected to pay a dividend of $1.50 per share at the end of theyear (D1 = $1.50). The stock sells for $34.50 per share,and its required rate of return is 11.5%. The dividend is expectedto grow at some constant rate, g, forever. What is the equilibriumexpected growth rate? 6.46% 6.63% 6.80% 6.97% 7.15%Explanation / Answer
Expected Dividend (D1) = $1.50
Stock price (P0) =$34.50
Required return (R ) = 11.5%
Calculating Expected Dividend GrowthRate:
Note: Dividend Growth Rate is also called as Capital gainsyield.
Capital gains yield = Rate of Return – Dividend yield
Dividend yield = Annual dividend per share / CurrentStock’s price per share
Dividend yield = $1.50 / $34.50
Dividend yield = 0.043478
Capital gains yield = Rate of Return – Dividend yield
= 0.115 - 0.043478
= 0.071522 (or)7.15%
Dividend Growth Rate (Capital gain) = 7.15%