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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