Question

1. Consider the following for a firm. Its stock price (P₀) is at $50, its payout ratio (POR) is 0.4, its EPS₁ is $2.00, and the investor required return is 10%. What is its required rate of return on equity?

Answer 1

D1 (dividend in year 1) is equals to 0.8 (working 1)

Po (price of the stock) is equals to 50 (Given in the question)

g (growth rate) is equals to 10% (Given in the question)

Putting the values

$Required rate of return = (D1 / Po) + g$

$= (0.8 / 50) + 10$

= 1.6% + 10% = 11.60%

Required rate of return in 11.60%

Working 1

$Dividend payout ratio = 0.4 = (Dividend per share / EPS)$

EPS * 0.4 = Dividend per share

2 * 0.4 = Dividend per share

dividend per share is equal to 0.8