Question

VolCal in at the end of the year is expected to have EPS of $5 the firm has a cost of capital of 19% currently pay out of all earnings as a divident using the assumption of perfect capital markets

using the dividend discount model, if the firm decides to payout 30% of earnings as a dividend the firms return on investment is 13.5% what will be the new stock price?

a. 43.7750

b.58.8835

c.41.666

d.50.2575

e.40.0000

f.45.4545

g. 0%

h. 2%

I 1%

j. 3%

k.60.2675

Answer 1

Growth (g) = Return on invetsment * (1-Pay out ratio)

=>Growth(g) = 13.5%* (1-0.30)

=>g = 9.45%

Current year Dividend (D0) = Current Year EPS* Payout ratio

=>D0 = $5*30% =$1.50

cost of capital (C)= 19%

Price Under DDM or Dividend discount model =

=> new stock price =

Hence new stock price = $17.19.