The common stock of Tommy’s Tools sells for $27.50. The firm’s beta = 1.2, the risk-free rate is 4%, and the market risk premium is 8%. Next year’s dividend is expected to be $1.50. Assuming that dividend growth is expected to remain constant for Tommy’s over the foreseeable future, what is the firm’s anticipated dividend growth rate? Answer is 8.1% according to test, but why?
Growth rate (g) rs-D1÷P0 Here,Stock price (P0) $ 27.50 Expected dividend (D1) $ 1.50 Required return ( r) 13.60% Growth rate (g) 8.15%13.60%-1.50÷27.50 4%+1.2*8%