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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%

Finance

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.

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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