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The Baron Basketball Company (BBC) earned $9 a share last year and paid a dividend of...

The Baron Basketball Company (BBC) earned $9 a share last year and paid a dividend of $6 a share. Next year, you expect BBC to earn $10 and continue its payout ratio. Assume that you expect to sell the stock for $140 a year from now. Do not round intermediate calculations. Round your answers to the nearest cent.

If you require 10 percent on this stock, how much would you be willing to pay for it? $

If you expect a selling price of $110 and require a 7 percent return on this investment, how much would you pay for the BBC stock? $

Solutions

Expert Solution

ans a)
Payout ratio = 6/9
66.67%
Next year dividend = $            6.67
10*66.67%
Price   = Present value of cash flow
Price = (6.67+140)/1.1
$ 133.33
Ans = $ 133.33
ans b) Price   = Present value of cash flow
Price = (6.67+110)/1.07
$ 109.03
Ans = $ 109.03

jeff jeffy answered 2 years ago
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