Muller’s Investigative Services has stock trading at $80 per share. The stock is expected to have a year-end dividend of $4 per share (D1 5 $4), and it is expected to grow at some constant rate, g, throughout time. The stock’s required rate of return is 14% (assume the market is in equilibrium with the required return equal to expected return). What is your forecast of g?

The dividend discount model is used to discount future dividends at the cost of equity to find the Value of the stock and is appropriate to use in this instance

SP = D1/r - g

What we have D1 $4, SP $80, r 14% we need to find the forecast of growth

Plug in the values in the formula

80 = 4/ 0.14 - g

80(0.14-g) = 4

80(0.14-g)/80 = 4/80

0.14 - g = 4/80

-g = 4/80 - 0.14 = -0.09

g = 0.09/9%

sohail09753 sohail09753 · Answer 2 · 2021-12-31T11:43:15+01:00

The forecasted growth rate of Muller’s Investigative Services is 9%.

The growth rate is the percentage rate at which the amount of dividend paid and the expected return is depended and increases with year by year. The forecasted growth rate depends upon the past rate of return, stock value, and dividend.

Computation:

The formula of dividend discount model is used for computing the growth rate.

Given,

[tex]SP[/tex] Stock price =$80

[tex]D_1[/tex] Current dividend =$4

[tex]r[/tex] rate of return =14%

The computation of growth rate as per the given data is as follows:

[tex]\begin{aligned}SP&=\dfrac{D_1}{r-g}\\\$80&=\dfrac{\$4}{0.14-g}\\0.14-g&=\dfrac{\$4}{\$80}\\\dfrac{\$4}{\$80}-0.14&=g\\g&=9\%\end{aligned}[/tex]

Therefore, the forecasted growth rate is 9%.

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