Question

Kinard's Kennels Inc. ROE is 20%. Their dividend payout ratio is 70%. The last dividend, just paid, was $2.00. If dividends are expected to grow by the company's internal growth rate indefinitely, what is the current value of Kinard's common stock if its required return is 18%? Select one: a. $11.52 b. $16.89 c. $17.67 d. $14.92

Answer 1

Answer:

option C

Step-by-step explanation:

given,

ROE = 20 %

dividend payout ratio = 70%

paid = $ 2.00

value of current stock if required return is 18% = ?

g = (1 - payout ) x  ROE

  = (1 - 0.7 ) x 20%

  = 6 %

dividend =  2 (1 + growth rate)

               = 2 x (1 + 0.06) =$ 2.12

as current value of stock

        = $\dfrac{D1}{required\ return - growth \ rate}$

        = $\dfrac{2.12}{0.18 - 0.06}$

        = $17.67

hence, the correct answer is option C