Question

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? Select one:

a. 6.01%
b. 6.17%
c. 6.33%
d. 6.49%
e. 6.65%

Answer 1

Answer:

Expected growth rate will be 6.65 %

So option (E) will be correct answer

Explanation:

We have given expected to pay a dividend at the end of the year $D_1= 1.25per\ share$

Stock price $P_0= 32.50$

Required rate of return $R_e=10.5%=0.105$

We have to find the expected growth rate

We know that expected growth rate is given by

$g=R_e-\frac{D_1}{P_0}=0.105-\frac{1.25}{32.50}=0.105-0.038462=0.0665=6.65$%

So option (E) will be the correct answer