The correct answer is A. 2.09%.
The dividend growth model is a valuation model that calculates the value of a stock based on the expected future dividends and the required rate of return. The model is based on the assumption that the company will continue to pay dividends at a constant growth rate in the future.
The formula for the dividend growth model is:
P0 = D1 / (r – g)
where:
P0 = the current price of the stock
D1 = the expected dividend per share in the next year
r = the required rate of return
g = the constant growth rate
In this case, the expected dividend yield is 5.5% and the expected rate of return is 11.5%. Therefore, the constant growth rate is:
g = (r – D1 / P0)
= (11.5% – 5.5%)
= 2.09%
Therefore, the correct answer is A. 2.09%.
Option B is incorrect because the constant growth rate cannot be negative. A negative growth rate would indicate that the company’s dividends are expected to decrease in the future.
Option C is incorrect because the constant growth rate cannot be greater than the required rate of return. If the constant growth rate were greater than the required rate of return, then the value of the stock would be infinite.
Option D is incorrect because the constant growth rate cannot be equal to the required rate of return. If the constant growth rate were equal to the required rate of return, then the value of the stock would be zero.