Question

In: Finance

Wayne, Inc.'s outstanding common stock is currently selling in the market for ​$28. Dividends of ​$3.01...

Wayne, Inc.'s outstanding common stock is currently selling in the market for ​$28. Dividends of ​$3.01 per share were paid last​ year, return on equity is 32 ​percent, and its retention rate is 26 percent.

a.  What is the value of the stock to​ you, given a required rate of return of 19 ​percent?

b.  Should you purchase this​ stock?

Solutions

Expert Solution

a. Growth rate = Return on equity * Retention rate

Growth rate = 0.32 * 0.26

Growth rate = 0.0832 or 8.32%

Value of stock = D0(1 + g) / (r - g)

Value of stock = $3.01(1 + 0.0832) / (0.19 - 0.0832)

Value of stock = $30.53

b. Yes


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