Question

Sanders, Inc., paid a $4 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:

The correct solution is "$42.94".

Explanation:

The given values are:

D0 = 4

Ks = 15%

As we know,

⇒ $g = (1-Div \ payout \ ratio)\times ROE$

      $=(1-60 \ percent)\times 13 \ percent$

      $=5.20 \ percent$

By using the Gordon Model, we get

⇒ $P0=Do\times \frac{(1+g)}{(Ks-g)}$

         $=4\times \frac{ (1+5.20 \ percent)}{(15 \ percent-5.20 \ percent)}$

         $=42.94$ ($)