Help wanted, implied growth rate from GGM wanted, growth, reading, required, recently

burning0spear

Hi guys
I just cant get my head around the working out for calculating an implied growth rate when given the P0, D0 and r.
Example, stock is $28.5, recently paid div of $2.15 and required rate is 10.5%, the answer is 2.75% but no idea how the reading got to that!
Any explanation appreciated. Thanks

tikfed

I doubt such elementary BS would show up on the exam. Unless they want the passing rate to be 80%.

SpyAli

Thank you,  algebra never my strong point.

Viceroy

Just look out for what is given - D0 vs. D1

strikethree

why are you studying now?…bit early for L2 2014….

iteracom

the formula is V = Do (1+g) / (r-g)
Plug in the values and we have:
28.5 = 2.15(1+g) / 0.105 - g
and find g
2.9925 - 28.5g = 2.15 + 2.15g
30.65g = 0.8425
therefore g = 0.02748 = 2.75%