You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is selling for $21.00 per share. The next dividend is expected to be $2.10, and you expect the dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the growth rate of dividends. A. 3% B. 5% C. 8% D. 10%
Question
You are considering the purchase of Miller Manufacturing, Inc.'s common stock. The stock is selling for 2.10, and you expect the dividend to keep growing at a constant rate. If the stock is returning 15%, calculate the growth rate of dividends. A. 3% B. 5% C. 8% D. 10%
Solution
To calculate the growth rate of dividends, we can use the dividend discount model (DDM) formula:
Dividend Growth Rate = (Dividend / Stock Price) - Return Rate
Given that the stock price is 2.10, we can substitute these values into the formula:
Dividend Growth Rate = (21.00) - 0.15
Dividend Growth Rate = 0.10 - 0.15
Dividend Growth Rate = -0.05
Since the growth rate of dividends cannot be negative, we can conclude that there is an error in the given information or calculation. Therefore, none of the options A, B, C, or D can be the correct answer.
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