Answer to Question #181161 in Other for Mburu

Question

SOSU, Inc has before tax income this year is $900,000. The company’s payout ratio is 40%. The company's common equity currently has a book value of $5,000,000. They just paid a dividend of $1.87, and the required rate of return on this stock is 10%. Compute the value of this stock if dividends are expected to continue growing indefinitely at the company's internal growth rate. Tax rate = 28%.

 

Answer 1

$Currentvalue=\frac{dividend in year 1}{Required rate-Growthrate}$

$Netincome=profit before tax\times (1-tax rate)$

$=900000\times(1-0.28)$

$=648,000$

$Growthrate=\frac{648,000}{5000000}\times100\times(1-0.40)=7.7767$

$Dividendin year1=1.87\times(1+0.0776)=2.01541$

$Value of the Stock=\frac{2.01541}{(10-7.776)}=\frac{2.01541}{2.224}=90.62$