Question

a. The common stock of Russel, Corp. is currently selling at $50 and investors require a rate of return of 15%. Russel is expected to pay a dividend of $2. At what rate the market would expect Russel's dividends to growth? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Growth Rate = ?

b. What will be the price of Russel's common shares if analysts revised its dividend growth rate down to 5%?(Round your answer to 2 decimal places.)

Price = ?

c. After that dividend growth revision, Russel's P/E ratio would be

A. The P/E ratio will increase.

B. The P/E ratio will decrease.

Answer 1

a. growth is computed as shown below:

= required rate of return - expected dividend / current price

= 0.15 - $ 2 / $ 50

= 11%

b. Price is computed as shown below:

= Expected dividend / ( required rate of return - growth rate )

= $ 2 / ( 0.15 - 0.05 )

= $ 20

c. After that dividend growth revision, Russel's P/E ratio will decrease

Feel free to ask in case of any query relating to this question