Question

Shackleford corporation net income this year is $800,000. The company generally retains 35% of net income for reinvestment. the company's common equity currently has a book value of 5,000,000. they just paid a dividend of $1.37, and the required rate of return on this stock is 12%. compute tha value fo this stock if dividends are expected to continue growing indefinitley at the comoanys interal growth rate
A. $22.61

B.$15.63

C. $11.42

D. $4.35

Answer 1

Answer:

A. $22.61

Explanation:

First,

find the growth rate(g);

g = ROE *retention  rate

retention  rate = 35%

ROE = Net income/value of equity

ROE = 800,000/5,000,000 = 0.16

Therefore, g = 0.16*0.35

g =0.056 or 5.6%

Price = $\frac{D0(1+g)}{(r-g)}$

D0 = Recently paid dividend

g = growth rate

r = required return

Price = $\frac{1.37(1.056)}{0.12-0.056} \\ \\ =\frac{1.44672}{0.064} \\ \\ =22.605$

Therefore, the value of this stock is $22.61