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Here are data on two stocks, both of which have discount rates of 18%: Stock A Stock B Return on equity 18 % 15 % Earnings per share $ 4.60 $ 2.90 Dividends per share $ 2.30 $ 2.30 a. What are the dividend payout ratios for each firm? (Enter your answers as a percent rounded to 2 decimal places.) b. What are the expected dividend growth rates for each stock? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) c. What is the proper stock price for each firm? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Respuesta :

jepessoa

Answer:

a. What are the dividend payout ratios for each firm?

  • payout ratio stock A = $2.30 / $4.60 = 0.5 = 50%
  • payout ratio stock B = $2.30 / $2.90 = 0.7931 = 79.31%

b. What are the expected dividend growth rates for each stock?

  • growth rate stock A = 0.18 x (1 - 50%) = 0.09 = 9%
  • growth rate stock B = 0.15 x (1 - 79.31%) = 0.031035 = 3.10%

c. What is the proper stock price for each firm?

  • stock A's proper price = $2.507 / (0.18 - 0.09) = $27.86
  • stock B's proper price = $2.3713 / (0.18 - 0.031) = $15.91

Explanation:

dividend payout ratio = dividend / EPS

growth rate = ROE x (1 - dividend payout ratio)

P₀ = Div₁ / (Re - g)

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