Question

The KJ Corporation has averaged an ROE of

19%

over

the past 5 years and that should continue into the

future. The firm has a payout ratio of

72%

on

earnings per share of

$7.45

and paid the dividend

yesterday. The discount rate for a firm of KJ's

risk level is

15%

a)

What is the expected Growth Rate of KJ's dividend? (note: round to the nearest 100th of a percent) (1 mark)

Enter Answer

b)

What is KJ's current stock price? (note: round to the nearest cent) (1 mark)

Enter Answer

Complete your rough work (if any) in the space below

↑

Enter your Final Answer Here

Answer 1

solution: a) g=ROE*retention ratio 0.19*(1-0.72) 5.32% g growth rate ROE return on equity D1 expected dividend at the end of year 1 PO Current price r required return b) PO=D1/(r-g) 7.45*0.72*1.0532/(0.15-0.0532) 58.36