Question

Jupiter Satellite Corporation earned $18 million for the fiscal year ending yesterday. The firm also paid out 30 percent of its earnings as dividends yesterday. The firm will continue to pay out 30 percent of its earnings as annual, end-of-year dividends. The remaining 70 percent of earnings is retained by the company for use in projects. The company has 2 million shares of common stock outstanding. The current stock price is $91. The historical return on equity (ROE) of 16 percent is expected to continue in the future.
What is the required rate of return on the stock?

Answer 1

Answer:

Rate of Reeturn is 14.5%

Explanation:T

The question is to calculate the required rate of return on the stock and this will be done as follows

Formula for rate = Ke = (D1 + P0) + g

In this formula, We need to first determine what our g or Growth rate is as follows:

Growth rate= Return on Equity x The Retention Ration

= 16% x 70% = 0.112 or 11.2%

D1 in the formula is the Expected Dividend per share

=Current dividend x (1+g)

= $18 million x 30% /2 million) x (1+0.112)

= 2.7 x 1.112 = 3.0024‬

P0 in the formula represents the current price of the stock = $91

Therefore based on the formula above

Ke = (D1 + P0) + g

= (3.004 /91) + 0.112

= 0.1450 x 100

= 14.5%