Help wanted, implied growth rate from GGM

CFA Level II Equities
#1

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

#2

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%

#3

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

#4

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

#5

Thank you, algebra never my strong point.

#6

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