Question

Weston Inc. has just reported annual earnings of $100 million, a payout ratio of 40.00%, and a ROE of 10.00%. Weston also just paid a dividend of $1.00 per share and expects to maintain its payout ratio, ROE, and number of shares outstanding indefinitely. Assuming that Weston makes dividend payments at the end of each year and has an annual cost of equity capital of 8.00%, estimate the price of a share of Weston’s common stock using the dividend discount model. Round your final answer to two decimal places.

Answer 1

price per share = current year dividend per share * (1 + g) / (r - g)

where g = dividend growth rate

r = cost of equity = 8%

g = ROE * (1 - payout ratio) = 10% * (1 - 40%) = 6%

price per share = current year dividend per share * (1 + g) / (r - g)

price per share = $1.00 * (1 + 6%) / (8% - 6%)

price per share = $53.00