Computer stocks currently provide an expected rate of return of 25%. MBI, a larg

Question

Computer stocks currently provide an expected rate of return of 25%. MBI, a large computer company, will pay a year-end dividend of $3.70 per share.

If the stock is selling at $67 per share, what must be the market's expectation of the growth rate of MBI dividends? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Computer stocks currently provide an expected rate of return of 25%. MBI, a large computer company, will pay a year-end dividend of $3.70 per share.

Explanation / Answer

Using the Gordon's Dividend Growth Rate Model, we use the following formula to derive the answer:

Required Rate of Return = D1/Current Stock Price + Growth Rate

Required Rate of Return = 25%

D1 = $3.70

Current Stock Price = $67

Growth Rate = To be Calculated

____________________________________________________________________________________________

Substituting Values in the Above Formula:

25% or .25 = 3.70/67 + Growth Rate

Growth Rate = .25 - 3.70/67 = 19.48%

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