Question

3. A company paid a $4.00 dividend last year. Assume that the company's ROE is 20.0%, its retention rate is 40% and the required rate of return is 12.0%. Calculate the Stock Price ($X.XX): (9 points) 4. A company is expected to pay a $2.00 dividend next year. The required rate of return is 10.0%, and the current stock price is $40.00. Calculate the expected Constant Growth Rate (X.X%): (9 points) 5. A company's current stock price is $50.00. Dividends of $2.50 were paid last year. Assume a constant growth rate of 5.0%. Calculate the Required Rate of Return (X.X%): (9 points) 6. A company's current stock price is $45.00. Assume a constant growth rate of 2.0% and a required rate of return of 10.0%. Calculate next year's Expected Dividend: (9 points)

Answer 1

rate positively ..

Ans 3	first we have to compute growth rate
	Growth rate = ROE*retention ratio
		20%*40%
		8.0%
	Stock price =		expected dividend next year/(required rate - growth rate)
			4*108%/(12%-8%)
			108.00
	Ans =		108.00
Ans 4	Growth rate =
			Required rate - expected dividend next year/Stock price)
			10%-2/40
			5.00%
Ans 5	Required rate =		2.5*105%/50+5%
			10.25%
Ans 6	Expected divided next year =			Stock price*(required rate - growth rate)
				45*(10%-2%)
				3.6