In her analysis of the stock of Xavier Corporation, Withers observes that it has a dividend of USD2 per share and a stock price of USD52. Two analyst interns have offered estimates of the company’s required rate of return and dividend growth rate, as shown in Exhibit 4.
Exhibit 4:
Xavier Corporation Required Rate of Return and Dividend Growth Rates (Estimates)
Intern 1 | Intern 2 | |
Required rate of return | 8.3% | 7.8% |
Growth rate, first four years | 5.0% | 4.8% |
Growth rate, beyond first four years | 3.6% | 4.0% |
Based on Exhibit 4 and Intern 1’s estimate of the required rate of return and the dividend growth rate for the first four years, the growth rate beyond the first four years consistent with the current price of USD52 is closest to:
- 3.80%.
- 4.17%.
- 4.23%.
You can try the growth rate given in the options directly rather than any back calculation.