BDDI, a bank holding company, is experiencing a growth spurt in earnings and div
ID: 2756875 • Letter: B
Question
BDDI, a bank holding company, is experiencing a growth spurt in earnings and dividends. The most recent annual dividend was $5.00 per slum: of common stock. Analysts expect to see 10 percent growth for the next three years. After that, earnings and dividends growth should settle down to 6 percent per year indefinitely thereafter. According to the Discounted Dividend Model, what is the price estimate tor one share ot BDDI stock in today's market? Assume a required return of 17%. A company paid a dividend last year of $1.75. The expected ROE for next year is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, find the dividend in the coming year.Explanation / Answer
14. Maximum price paid for stock today = Dividend * PVF + Par value* PVF
= 1.25 * 0.909 + 32 * 0.909
= 30.22
15.
price of share = D1 / (Ke - g)
= 6.655 / (0.17 - .06)
= $ 60.5
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