g. Kings Donut Inc common stock sells for $39.86 a share at a market rate of return of 9.5%. The company just paid its annual dividend of $1.20. What is the rate of growth of its dividend? Assume stock is in equilibrium.

6.29% is the rate of growth

Explanation:

The following formula is used

Price = D1 / ke - g

39.86 = 1.2 multiply with (1 + g) / 0.095 - g

3.7867 - 39.86 g = 1.2 + 1.2 g

2.5867 = 41.06 g

Now, we have to calculate the value of g

g = 2.5867 divide 41.06

= 0.0629

= 6.29 %

Where:

G = growth, ke = market rate of return, D1 = dividend (annual), P = price of the share of company