Here are data on two stocks, both of which have discount rates of 14%: What are

Question

Here are data on two stocks, both of which have discount rates of 14%:

What are the dividend payout ratios for each firm? (Enter your answers as a percent rounded to 2 decimal places.)

What are the expected dividend growth rates for each firm? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

What is the proper stock price for each firm? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Here are data on two stocks, both of which have discount rates of 14%:

Explanation / Answer

a.

Dividend payour ratio (Stock A)=Dividend/earnings per share=1.20/1.50=80%

Dividend payour ratio (Stock B)=Dividend/earnings per share=1.20/1.40=85.71%

b.

expected growth rate(stock A)=ROE*(1-dividend payout ratio)=14%*(1-80%)=2.80%

expected growth rate(stock B)=ROE*(1-dividend payout ratio)=10%*(1-85.71%)=1.43%

c.

Stock price of A=Do*(1+g)/(r-g)=(1.2*1.0280)/(0.14-0.0280)=11.01

Stock price of B=Do*(1+g)/(r-g)=(1.2*1.0143)/(0.14-0.0143)=9.68

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.