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Dorpac Corporation has a dividend yield of 1.5%. Its equity cost of capital is 8%, and its dividends are expected to grow at a constant rate. a. What is the expected growth rate of Dorpac’s dividends? b. What is the expected growth rate of Dorpac’s share price?

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Answer:

  • The expected growth rate of Dorpac’s dividends is 6.5%
  • The expected growth rate of Dorpac’s share price 6.5%

Explanation:

a> the expected growth rate of Dorpac’s dividends= Div Yld + g =Ce , so g= 8% – 1.5% = g = 6.5%.

b> With constant dividend growth, the expected growth rate of Dorpac’s share price is also expected to grow at  rate g = 6.5% .

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