Question

The Lory Company had net earnings of $127,000 this past year. Dividends of $38,100 were paid. The company's equity was $1,587,500. If Lory has 100,000 shares outstanding with a current market price of $11.625 per share, and a dividend growth rate is 5.6%, what is the firm’s discount rate?

Answer 1

Answer:

Rate = 9.05%

Explanation:

To calculate the Dividend per share we'll have to

= Total Dividends Paid / Total Shares

= 38,100/100,000

= 0.38  Dividend per share

So, if we are to be using the constant Growth Model,

$P= \frac{D_{1}}{r-g}$

P = Price of Stock

$D_{1}$ = Estimated Dividends for next period

r = Required rate of return

g = Growth Rate

11.625 = 0.38(1.056)/(r - 0.056)

r = 9.05%