In: Finance
Walton, Inc. forecasts earnings next year of $4 per share. Walton, Inc. has a dividend payout ratio of 30% and a required return of 15%. Its ROE is 17%. What is the company's PVGO based on the Gordon growth model?
options:
$17.14
$12.04
$38.71
$-$4.86
$-$14.19
- Expected Dividend next year(D1) = Earnings next year*dividend payout ratio
= $4*30%
D1 = $1.20
- Growth rate = ROE*(1-dividend payout ratio)
Growth rate = 17%*(1-0.30)
Growth rate(g) = 11.9%
Required rate of return(Ke) = 15%
Calculating the Current Stock Price:-
P0 = $38.71 per share
Calculating PVGO based on the Gordon growth model:-
PVGO = Stock Price - (earnings/Required rate of return)
PVGO = $38.71 - ($4/15%)
PVGO = $38.71 - $26.67
PVGO = $12.04
Option 2