WannaGrowMaize Corporation (WGMC) has expected earnings per share of $5. It has a history of paying...

WannaGrowMaize Corporation (WGMC) has expected earnings per share of $5. It has a history of paying cash dividends equal to 25% of earnings. The market capitalization rate for WGMC stock is 10% per year, and the expected rate of return on future investments is 12% per year. Using the constant growth rate discounted dividend model: What is the expected growth rate of dividends? What is the model’s estimate of the present value of the stock? What is the expected price of a share a year from now?

Expert Solution

A. Constant growth rate= (return on equity X retention ratio)

= (10%*-(1-.25)= 7.5%

B. Present value of stock= (expected dividend)/(required rate of return-growth rate)

= 5/(.12-.075)

=$111.11

C. Expected price of share one year from now

= (111.111*1.075)= $119.4444

jeff jeffy answered 2 years ago

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