Company’s current price of share is Rs 60 and dividend per share is Rs. 4. If its capitalization rate is 12 percent, what is the dividend growth rate?

Correct option is D

Introduction:

A dividend model explains how a company distributes its profits to shareholders and helps assess the value of its shares. Gordon Growth Model:Values a company’s share based on expected future dividends growing at a constant rate.

Information Booster:

To find the dividend growth rate (g), we use the Gordon Growth Model (Dividend Discount Model - DDM):

where:

• P = Current Price of Share = Rs. 60
  
• D₁ = Dividend per share = Rs. 4
• r = Capitalization rate (Required Rate of Return) = 12% or 0.12
• g = Dividend Growth Rate (to be calculated)

Rearranging the formula to solve for $g$:

Additional Knowledge:

• Gordon Growth Model is widely used for valuing stocks with constant dividend growth.

• This model assumes that dividends will continue to grow at a constant rate indefinitely.

• It is useful for investors who prefer stable dividend-paying companies.

• The dividend growth rate (g) is influenced by retained earnings, company profitability, and reinvestment rate.

• A company with a high dividend growth rate usually has strong future earnings potential.