The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%

Finance Feb 10, 2021

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.

Expert Solution

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

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote