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Homework answers / question archive / The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%
The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's payout ratio is 60%, what is the value of the stock assuming a constant growth of dividends? Round your answer to two decimal places.
Computation of Value of Stock:
Retention Ratio = 1-Payout Ratio
= (1-0.60)
= 0.40
Growth rate = ROE*Retention Ratio
=(0.12*0.40)
= 4.8%
Dividend payout=$5*60%=$3
Value of Stock = Dividend/(Market Capitalization Rate-Growth Rate)
= 3/(0.10-0.048)
= 3/5.2%
Value of Stock = $57.69