{"id":17730,"date":"2021-07-14T20:01:59","date_gmt":"2021-07-14T20:01:59","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=17730"},"modified":"2026-06-22T08:22:11","modified_gmt":"2026-06-22T08:22:11","slug":"the-implied-dividend-growth-rate","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/the-implied-dividend-growth-rate\/","title":{"rendered":"The Implied Dividend Growth Rate"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"A company has a required rate of return of 12%, a share price of $30, and an expected next-period dividend of $2.00. What is the dividend growth rate closest to?\",\r\n    \"text\": \"Consider a company with a required rate of return of 12% and a share market price of $30. If the next period\u2019s dividend is expected to be $2.00, the dividend growth rate is closest to:\",\r\n    \"answerCount\": 3,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"33%\"\r\n    },\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"33%\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"25%\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"50%\"\r\n      }\r\n    ]\r\n  }\r\n}\r\n<\/script><\/p>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/fiJA5WhgigU\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>Different growth rate assumptions may explain the differences between the estimated values of a share and the actual market value. Given the price, the expected dividend, and the required rate of return, the dividend growth rate reflected in the price can be inferred using the Gordon growth model. The plausibility of the growth rate can then be evaluated.<\/p>\r\n<div style=\"text-align: center; margin: 28px 0;\"><a style=\"display: inline-block; background: #1a73e8; color: #ffffff; padding: 12px 26px; border-radius: 40px; font-size: 16px; font-weight: 500; text-decoration: none; line-height: 1.4;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Calculate Implied Growth Rates <\/a><\/div>\r\n<h4>Example: The Implied Dividend Growth Rate<\/h4>\r\n<p>Suppose a company\u2019s current dividend is $3.00 and the required rate of return is 11%. The dividend growth rate that would be required to justify a share market price of $45 would be:<\/p>\r\n<p>$$\\begin{align*}\\text{V}_0&amp;= \\frac{\\text{D}_0(1+\\text{g})}{(\\text{r}-\\text{g})}\\\\ \\\\45&amp;=\\frac{3(1+\\text{g})}{(11\\%-\\text{g})}\\\\ \\\\4.95-45\\text{g}&amp;=3+3\\text{g}\\\\ \\\\48\\text{g}&amp;=1.95\\\\\\ \\\\text{g}&amp;=4.06\\%\\end{align*}$$<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Consider a company with a required rate of return of 12% and a share market price of $30. If the next period\u2019s dividend is expected to be $2.00, the dividend growth rate is <em>closest<\/em> to:<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>33%.<\/li>\r\n\t<li>25%.<\/li>\r\n\t<li>50%.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is A.<\/strong><\/p>\r\n<p>$$\\begin{align*} \\text{V}_0&amp;= \\frac{\\text{D}_0(1+\\text{g})}{(\\text{r}-\\text{g})} \\\\ \\\\ 30&amp;=\\frac{2.00}{(12\\%-\\text{g})} \\\\ \\\\3.6-30\\text{g}&amp;= 2\\\\ \\\\30\\text{g}&amp;=1.6\\\\ \\\\\\text{g}&amp;=5.33\\%\\end{align*}$$<\/p>\r\n<\/blockquote>\r\n<p>Reading 23: Discounted Dividend Valuation<\/p>\r\n<p><em>LOS 23 (e) C<\/em><em>alculate and interpret the implied growth rate of dividends using the Gordon growth model and current stock price.<\/em><\/p>\r\n\r\n<div style=\"background: #f5f7fb; padding: 24px 18px; border-radius: 12px; text-align: center; margin: 36px 0 18px;\"><a style=\"display: inline-block; background: #1a73e8; color: #ffffff; padding: 10px 24px; border-radius: 40px; font-size: 16px; font-weight: bold; text-decoration: none; margin-bottom: 16px;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a>\r\n<div style=\"font-size: 14px; color: #333333; max-width: 650px; margin: 0 auto; line-height: 1.6;\">Learn how to infer dividend growth rates from stock prices, expected dividends, and required returns using the Gordon Growth Model.<\/div>\r\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Different growth rate assumptions may explain the differences between the estimated values of a share and the actual market value. Given the price, the expected dividend, and the required rate of return, the dividend growth rate reflected in the price&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,401],"tags":[216,402,440,444],"class_list":["post-17730","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-equity-valuation","tag-cfa-level-2","tag-equity-valuation","tag-reading-27-discounted-dividend-valuation","tag-the-implied-dividend-growth-rate","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Implied Dividend Growth Rate | AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn how the implied dividend growth rate is calculated and how growth 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