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Westin Corporation common stock recently paid a dividend of $2
Westin Corporation common stock recently paid a dividend of $2.60. The firm typically pays out 50% of its earnings as dividends and retains the rest for investment in the firm. Westin has a return on equity of 15 percent. If investors require a return of 12 percent, what is the intrinsic value of the firm's common stock? Assume dividends will grow at a constant rate. $57.78 O $62.11 O $24.92 $23.29 O $21.67
Expert Solution
Growth rate = (1 - dividend payout) * ROE
Growth rate = (1 - 0.5)*0.15
Growth rate = 0.075 or 7.50%
Next year dividend = 2.6 (1 + 0.075) = 2.795
Value = Next year dividend / required rate - growth rate
Value = 2.795 / 0.12 - 0.075
Value = 2.795 / 0.045
Value = $62.11
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