Question

Principles of Finance-FIN 343 Ou-Chapter 10 Ac h os Return on Equity (ROE) of 15 ON and retains 60.0% of its earnings Clate the expected Constant Growth Rate (XXX): 19points) 2 A company paid a $3.00 dividend last year. Assume a constant growth rate of 5.0% anda required rate of return of 15.0% Calculate the Stock Price (SX.XX): 19 points) 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.X): 19 points) 10.0%, and the current stock price is $40.00 Calculate the expected Constant Growth Rate (X.XX): 19 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 U p 6. A company's current stock price is $45.00. Assume a constant growth rate of 2 required rate of return of 10.0%. Calculate next year's Expected Dividende

Answer 1

1.ROE*RETENTION RATIO

=15*60%=9% IS A GROWTH RATE

2.FORMULA FOR FINDING THE PRICE OF SHARE IS D0+G/Ke-G=PO

DO= DIVIDEND OF LAST YEAR,G= GROWTH RATE ,KE=COST OF EQUITY,PO= PRICE OF SHARE

THIS FORMULA IS APPLICABLE FOR THE ALL THE 8 ANSWERS BELOW

SO 3+5%/15-5=31.5 IS THE PRICE OF SHARE

3. FIRST WE NEED TO FIND OUT GROWTH RATE AND TO FIND OUT THE PRICE OF SHARE

WE ALREADY SEEN THE GROWTH RATE FORMULA ABOVE BASED ON THAT

20*40%=8% IS A GROWTH RATE

SO USING THE FORMULA GIVEN IN 2 POINT

4+8%/12-8=108

4. WE NEED TO FIND OUT GROWTH RATE SO SAME USE THE FORMULA ABOVE

=2/10-G=40

2/40=10-G

0.05=10-G

G=9.95%

5.IN THIS CASE WE NEED TO FIND OUT COST OF EQUITY

=2.50+5%/KE-5%=50

2.625/50=KE-5%

0.0525=KE-5%

KE=0.0525+5

KE=5.0525

6.IN THIS CASE WE NEED TO FIND OUT THE DIVIDEND PAID LAST YEAR

DO+2%/10%-2%=45

D0+2%/8%=45

DO+2%=45*8%

DO+2%=3.6

DO=3.6-2%

DO=3.528

7.IN THIS CASE WE FIRST FIND OUT THE RETENTION RATIO TO FIND OUT THE GROWTH RATE

USING SAME FORMULA

ROE*RETENTION RATIO

RETENTION RATIO=EPS-DPS/EPS

SO ACCORDINGLY 30-16/30=46.66%

7A.SO GROWTH RATE IS 17*46.66%=7.93 OR 8%

7B.PRICE OF SHARE

16+8%/14%-8%=288

7C.SHARE PRICE SHOULD BE $288 BUT ACTUAL PRICE IS 300 SO PRICE IS OVERVALUED SO I DONT BOUGHT THE OVERVALUED SHARE.

8.I DONT HAVE THE SUBJECT KNOWLEDGE.

THANK YOU