Your company had net income of $125,000 for the year just ended. Dividends of $77,750 were...

Your company had net income of $125,000 for the year just ended. Dividends of $77,750 were paid on the company's beginning equity of $1,375,000. If the company has 96,000 common shares outstanding with a current market price of $11.75 per share, what is the required rate of return on the shares assuming a constant sustainable growth rate of dividends?
options: 10.04%
10.30%
10.57%
10.83%
11.09%
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Beginning equity	$ 1,375,000
Net income	$ 125,000
Earning rate	125000/1375000
Earning rate	9.09%

Net income	$ 125,000
Dividend	$ 77,750
Retention ratio=	(125000-77750)/125000
Retention ratio=	37.80%

Growth rate=	Retention * Earning
Growth rate=	3.44%

Dividend per share	77750/96000
Dividend per share	$ 0.81

Share price	$ 11.75

Share price=	Next dividend/(Cost - Growth)
11.75=	0.81*(1+3.44%)/(Cost - 3.44%)
(Cost - 3.44%)=	0.81*(1+3.44%)/11.75
(Cost - 3.44%)=	7.13%
Cost=	10.57%

jeff jeffy answered 1 year ago

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