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the shares of Borough co have a current market price of 74 cents each, ex- div. It is expected that the dividend in one years’s time will be 8 cents per share. The required rate of return from dividends on these shares is 16% per annum.
If expected growth in future div is constant annual percentage, what is the expected annual dividend growth?Please don’t simply set me test questions and expect an answer – you must have an answer in the same book in which you found the question, so you should ask about whatever it is in the answer that you are not clear about and then I will explain.
You will know from my free lectures that the market value is calculated using the growth model formula that is given on the formula sheet:
Po = Do(1+g) / (Re – g).For this question, Po = 74c; Do(1+g) is the dividend in 1 years time, which is 8c; and Re is the required rate of return which is 16% (or 0.16).
If you put these figures in the formula, it is then using simple algebra to calculate g.
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