suppose a compnay has net income of $1000,000 and a plowback ratio of 40%. There

Question

suppose a compnay has net income of $1000,000 and a plowback ratio of 40%. There are 50,000 shares of stock outstanding. The compnay plans to increase dividends by 22% each year for the next 2 years and then aplly a 2.25% growth rate to dividends each year indefinitely. the required return is 13%

What should the stock price be today?

what is this year's deviend yield? what is this year's capital gains yield?

What will the stock price be in 2 years?

What will dividend yield and captial gains yield be in 2 years?

Explanation / Answer

Current Dividend = 1,000,000 x (1 – 40%) = 600,000

Stocks outstanding = 50,000

Current Dividend Per Share = $ 12

Dividends at end of year 2 = $ 12 x 1.22 x 1.22 = $ 17.86 per share

Require Return on Stock = 13%

Price of stock at end of year 2 = Dividend / (return – dividend growth) = 17.86 / (13% - 2.25%) = $166.15

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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