Walton, Inc. forecasts earnings next year of $4 per share.Walton, Inc. has a dividend payout...

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

Solutions

Expert Solution

- 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

jeff jeffy answered 2 years ago

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