Constant Dividend Growth Model: Calculating Expected Growth Rate for ELO Stock

What is the expected annual growth rate of the dividend for ELO stock?

Based on the Constant Dividend Growth Model, how can we determine the growth rate of the dividend for ELO stock?

Answer:

The expected annual growth rate of the dividend for ELO stock is 5.15%.

Reflecting on the data provided, we can see that the Constant Dividend Growth Model is a valuable tool for investors to estimate the growth rate of dividends for a particular stock. In this case, we are focusing on ELO stock, which is expected to pay an annual dividend of $4.32 per share in one year. Additionally, ELO shares are currently trading for $92.51 on the NYSE, with an expected annual rate of return of 9.82%.

By using the Constant Dividend Growth Model formula, we can calculate the growth rate as follows:

Price = [tex]\frac{Next Dividend}{Rate of Return - Growth rate}[/tex]

$92.51 = [tex]\frac{4.32}{0.0982 - growth rate}[/tex]

9.084482 - 92.51g = 4.32

9.084482 - 4.32 = 92.51g

92.51g = 4.764482

g = 0.0515

Therefore, the growth rate of the dividend for ELO stock is calculated to be 5.15%.

Investors can use this information to make informed decisions about investing in ELO stock, considering the expected annual growth rate of the dividend along with other factors such as the current market price and rate of return. It is essential to analyze all aspects of a potential investment before making a decision, and the Constant Dividend Growth Model provides a useful framework for this evaluation.