Question

Sanders, Inc., paid a $3 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________.

Answer 1

Answer:

$32.20

Explanation:

The computation of the value of the stock is shown below:

Dividend per share = $3

The Required rate of return = 15%

Return on equity = 13%

Dividend payout ratio = 60%

Based on the above information,

First we have to determine the growth rate which is

Growth rate = (1 - Div Payout ratio) × ROE

= (1 - 60%) × 13%

= 5.20%

Now the value of the stock is determined by using the Gordon model  

= Last year dividend × (1 + growth rate) ÷ (Required rate of return - growth rate)

= $3 × (1 + 5.20%) ÷  (15% - 5.20%)

= $32.20