Suppose that Son of Son of Unkempt Inc. common stock will pay an annual dividend

Question

Suppose that Son of Son of Unkempt Inc. common stock will pay an annual dividend next year of $14.05, has

net income of $562 million, is keeping back $178 in retained earnings, has common book value of $9,289

million, has a beta with respect to the market of 0.95 times (where the average yearly market return is 15% and

the average yearly risk free rate is 4.5%), what would the common stock be worth on a per share basis? If there

are 23 million shares outstanding, what is its market capitalization?

Explanation / Answer

Answer: The common stock be worth on a per share basis:

=$9289/23=$403.87

Ke=Rf+Beta[(E(rm)-Rf)]

=4.5%+0.95[(15%-4.5%]

=14.475%

Market capitalization=$562/14.475%=3882.56

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