Question

Homework 3 Due on Tuesday, November 26 1 Xytex Products just paid a dividend of $1.62 per share, and the stock currently sells for $28. If the discount rate is 10 percent, what is the dividend growth rate? 2. The last dividend paid by New Technologies was an annual dividend of $1.40 a share. Dividends for the next 3 years will be increased at an annual rate of 8 percent. After that, dividends are expected to increase by 3 percent each year. The discount rate is 16 percent. What is the current value of this stock? 3. Home Interiors has net income of $248,000. The firm has decided to pay $160,000 of that income out to the shareholders. What is the firm's retention ratio?

Answer 1

1.

Compute the dividend growth rate, using the equation as shown below:

Required rate = [{Dividend just paid*(1 + Growth rate)}/Market price] + Growth rate

              10% = [{$1.62*(1 + Growth rate)}/$28] + Growth rate

              10% = 0.05785714285 + 0.05785714285*Growth rate +Growth rate

After solving the above equation, the growth rate comes out to be:

1.05785714285*Growth rate = 0.1 - 0.05785714285

            Growth rate = 0.04214285715/ 1.05785714285

                                = 3.983795%

Hence, the growth rate is 3.983795%