Question

In: Finance

Your analysis of stock A has yielded the information below. The market capitalization rate is 10%...

  1. Your analysis of stock A has yielded the information below. The market capitalization rate is 10% per year. (3/. )

Stock A

Expected return on equity, ROE

13%

Estimated earnings per share, E1

$2.00

Estimated dividends per share D1

$1.00

Current market price, P0

$27.00
  1. What is the expected dividends payout ratio?
  1. What is the expected dividends growth rate?

  1. Should you invest in this stock?

Solutions

Expert Solution

A. Computation of Expected Dividend payout ratio

Earnings per Share (E1) = $2

Dividend per Share (D1) =$1

Payout Ratio = (D1 / E1) *100

                      =(1 / 2) * 100

                     = 50%

Payout Ratio is 50%

B. Computation of Expected Dividend Growth rate

Growth rate = ROE * ( 1 - Payout Ratio)

Growth rate = 13% ( 1- 0.5)

Growth rate = 13% * (0.5)= 6.5%

C. Checking whether to invest in this stock

In order to check whether to invest in this stock, we need to calculate the value of this stock and compare with the price.

Value of the stock can be calculated by the following formula:

We should buy this stock since its price is $27 and its value is coming out to be $28.57

jeff jeffy answered 2 years ago
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