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Homework answers / question archive / 1) Consider a stock that will have price of $35

1) Consider a stock that will have price of $35

Finance

1) Consider a stock that will have price of $35.04 one year from now and pay a dividend of $4.35 in one year. The expected rate of return is 5.7%. What is the current price of the stock?

2.A stock has a return on equity of 15.7% and a plowback ratio of 50%. What is the sustainable growth rate? Enter you answer as a percentage. Do not include the percentage sign in your answer.

3.Consider a stock that will have dividends in the next three periods of $1.34, $1.61, and $1.67, respectively. The interest rate is 12%. What is the growth rate of the dividend in period 3? Enter your answer as a percentage. Do not include the percentage sign in your answer.

4.Stark Industries expects an earnings per share of $2.8 and reinvests 45% of its earnings. Management projects a rate of return of 2% on new projects and investors expect a 9% rate of return on the stock. What is the sustainable growth rate? Enter your answer as a percentage. Do not include the percentage sign in your answer.

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1) Computation of Current Price of Stock:

Current Price of the Stock =(Price one year from now + Dividend in one year)/(1+r) 

=(35.04+4.35)/(1+5.7%) 

=37.27

 

2) Computation of Sustainable Growth Rate:

Sustainable Growth Rate = Return on Equity * Plow back Ratio  

= 15.7% * 50%

= 7.85%

 

3) Computation of Growth Rate of the Dividend in Period 3:

Growth rate of the dividend in period 3 = (Dividend in year 3 - Dividend in year 2) / Dividend in year 2

= ( 1.67 - 1.61) / 1.61

= 0.06 / 1.61

= 3.73%

Growth rate of the dividend in period 3 = 3.73%

 

4)  Computation of Sustainable Growth Rate:

Sustainable growth rate (g)=Retention ratio*Return on equity

Here,

Retention ratio=45%

Return on equity=2%

Sustainable Growth Rate = 45%*2%=0.9%

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