Hyper, Inc. is a growing firm that chooses to payout only 20% of its earnings as dividends (thus, it has a plowback ratio of .8)

Question

3 years ago

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Hyper, Inc. is a growing firm that chooses to payout only 20% of its earnings as dividends (thus, it has a plowback ratio of .8)

. Hyper expects EPS next year of $5 and and a Return on Equity of 15%. This ROE is expected to be maintained indefinitely and is also appropriate to use for Hyper's required return on equity. Given this information, what is the current price of Hyper, Inc. stock

Business

1 answer:

alukav5142 [94] · Answer 1 · 2022-08-23T07:11:10+03:00

Answer:

a.$33.33

Explanation:

Options are "<em>a.$33.33 , b. $30.13 , c. $16.67 , d. $26.66"</em>

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EPS1 = $5

D1 = 0.20($5) = $1

Sustainable Growth Rate = (0.80)(0.15) = 12%

As per Dividend Discount Model,

Stock Price = D1/(r - g)

Stock Price = 1/(0.15 - 0.12)

Stock Price = $33.33

Therefore, the current price of Hyper, Inc. stock $33.33