24) Modem Development, Inc. paid a dividend of $5.00 per share on its common sto

Question

24) Modem Development, Inc. paid a dividend of $5.00 per share on its common stock
yesterday. Dividends are expected to grow at a constant rate of 10% for the next two
years, at which point the dividends will begin to grow at a constant rate indefinitely.
If the stock is selling for $50 today and the required return is 15%, what it the ex-
pected annual dividend growth rate after year two?
a. 5.000%
b. 3.365%
c. 4.556%
d. 3.878%

I think the answer is a. Can anyone confirm and please show how to calculate? I would appreciate it.

Explanation / Answer

formula is stock price = dividend*(1- growth rate)/(required rate - growth rate) stock price =50 , dividend = $5 required rate =15% keeping this values you get answer a that is 5%

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