Question

In: Finance

The common stock of GVK Ltd. is currently selling for Rs. 70 per share. Dividend per...

The common stock of GVK Ltd. is currently selling for Rs. 70 per share. Dividend per share has grown from Rs. 2 to the current level of Rs. 6 over the past ten years and this dividend growth is expected to continue in future also. What is the required rate of return of the GVK Ltd. ?

Solutions

Expert Solution

Step 1 - Calculation of dividend growth rate in past 10 years
We can use the Future value formula to calculate dividend growth rate.
Future value = P x (1+g)^n
Future value = 6
P = dividend paid 10 years before = 2
g = growth rate = ?
n = number of years = 10
6 = 2 x (1+g)^10
3 = (1+g)^10
g = 0.116
Dividend growth rate = 11.6%
Step 2 - Calculation of the required rate of return of the GVK Ltd
We can use the Dividend discount formula to calculate the rate of return.
Current Stock price = D11 / (r - g)
Current stock price = $70
Dividend payable in 11th year = Current dividend x (1+growth rate) = $6 x (1+0.116) = $6.70
r = required rate of return = ?
g = dividend growth rate = 11.6%
70 = 6.70 / (r - 0.116)
(r - 0.116) = 0.095714
r = 0.2117
Required rate of return of the GVK Ltd. = 21.17%

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

ABC's common stock is currently selling for $40 per share. The dividend expected to be paid...
ABC's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last 5 years. 5 years ago, the dividend was $3.2. It is expected that to sell, a new common stock issue must be underpriced by $1 per share in floatation costs and a new common stock must be underderpriced $1 per share. show...
Raphael Corporation’s common stock is currently selling on a stock exchange at $192 per share, and...
Raphael Corporation’s common stock is currently selling on a stock exchange at $192 per share, and its current balance sheet shows the following stockholders’ equity section: Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding $ 70,000 Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding 180,000 Retained earnings 340,000 Total stockholders' equity $ 590,000 Problem 11-5A Part 5 5.1 If two years’ preferred dividends are in arrears and the board of directors declares cash dividends...
Raphael Corporation’s common stock is currently selling on a stock exchange at $180 per share, and...
Raphael Corporation’s common stock is currently selling on a stock exchange at $180 per share, and its current balance sheet shows the following stockholders’ equity section: Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding $ 90,000 Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding 160,000 Retained earnings 380,000 Total stockholders' equity $ 630,000 a.What is the current market value (price) of this corporation’s common stock? b.What are the par values of the corporation’s preferred...
Raphael Corporation’s common stock is currently selling on a stock exchange at $181 per share, and...
Raphael Corporation’s common stock is currently selling on a stock exchange at $181 per share, and its current balance sheet shows the following stockholders’ equity section: Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding $ 75,000 Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding 140,000 Retained earnings 350,000 Total stockholders' equity $ 565,000 Required: 1. What is the current market value (price) of this corporation’s common stock? Raphael Corporation’s common stock is currently selling...
Soltech Company’s common stock is currently selling on a stock exchange at $90 per share, and...
Soltech Company’s common stock is currently selling on a stock exchange at $90 per share, and its current balance sheet shows the following stockholders’ equity section. Preferred stock—8% cumulative, $___ par value, 1,500 shares authorized, issued, and outstanding ................................... $ 375,000 Common stock—$___ par value, 18,000 shares authorized, issued, and outstanding ................................... 900,000 Retained earnings .................................................... 1,125,000 Total stockholders’ equity .............................................. $2,400,000 C2 A4 Required 1. What is the current market value (price) of this corporation’s common stock? 2. What...
Raphael Corporation’s common stock is currently selling on a stock exchange at $180 per share, and...
Raphael Corporation’s common stock is currently selling on a stock exchange at $180 per share, and its current balance sheet shows the following stockholders’ equity section: Preferred stock—5% cumulative, $___ par value, 1,000 shares authorized, issued, and outstanding $ 55,000 Common stock—$___ par value, 4,000 shares authorized, issued, and outstanding 160,000 Retained earnings 340,000 Total stockholders' equity $ 555,000 1. What is the current market value (price) of this corporation’s common stock? Market price per share 2. What are the...
Raphael corporation common stock is currently selling it stock exchange at 194 per share, and its...
Raphael corporation common stock is currently selling it stock exchange at 194 per share, and its current balance sheet shows the following stockholders equity section: Preferred stock - 5% cumulative, $_par value, 1000 shares authorized, issued, and outstanding =75,000 Common stock $_par value, 4,000 authorize, issued, and outstanding =180,000 Retain Earnings =390,000 Total stockholders equity =645,000 If two years preferred dividends are in arears and the board of directors declare cash divided of 22,500, what total amount will be paid...
Raphael corporation common stock is currently selling it stock exchange at 194 per share, and its...
Raphael corporation common stock is currently selling it stock exchange at 194 per share, and its current balance sheet shows the following stockholders equity section: Preferred stock - 5% cumulative, $_par value, 1000 shares authorized, issued, and outstanding =75,000 Common stock $_par value, 4,000 authorize, issued, and outstanding =180,000 Retain Earnings =390,000 Total stockholders equity =645,000 If two years preferred dividends are in arears and the board of directors declare cash divided of 22,500, what total amount will be paid...
A stock is selling for $40 per share currently. The next dividend will be $1 per share, and will grow at 12% per year forever.
A stock is selling for $40 per share currently. The next dividend will be $1 per share, and will grow at 12% per year forever. What is the rate of return required by investors? Answer: 14.5%
The common stock of KRJ Enterprises is currently selling for$70.25 per share. Last year the...
The common stock of KRJ Enterprises is currently selling for $70.25 per share. Last year the company reported total earnings of $315 million and there were 101 million shares of common stock outstanding. The common stock account is valued at $24 million, additional paid-in capital is $291 million, and retained earnings is $626 million. What was the company's book value per share? Present your answer to two decimal places. e.g. $20.00.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT