industry average trailing dividend yield = 3.7% Bradley suggests that Tanner calculate the implied long-term dividend growth rate for GNSK using the Gordon growth model. Bradley believes that the required return and dividend yield for the industry are the most stable indicators and should be used in the valuation computations. q: Using Bradley’s assumptions regarding GNSK and the data from Exhibit 1, GNSK’s implied long-term dividend growth rate is closest to:
8.0%.
7.0%.
7.3% answer is 2. this was my approach: 21.875= 0.809375 (which i got by doing 3.7% dividend yield multiplied by price) * 1.07= 0.8660312 now 0.8660312/0.04 (11%-7%) = 21.65078. why does my approach not work for this? getting confused
Yes if they meant trailing dividend, then 7% is the closest. If they meant leading dividend, then 7.3% is the closest.
The rounding error throws the trailing dividend off while the if they meant leading dividend, the 7.3% is right on. I never trust the question writers because they get so many things wrong.
Sure, but if the question specifically states trailing dividend yield, then you would solve for it as such. In the context of the question being posed, the answer of 7.3% wouldn’t be correct and is likely there to throw people off.