Question

Problem 7-21 Constant-Growth Model (LO2) Here are data on two stocks, both of which have discount rates of 15% Ints Stock A 15% Stock 10% $1.50 $1.00 Return on equity Earnings per share Dividends per share eBook $2.00 $1.00 Hint Print a. What are the dividend payout ratios for each firm? (Enter your answers as a percent rounded References Stock A AL 0.50% Stock B 067) Dividend payout ratios b. What are the expected dividend growth rates for each firm? (Do not round intermediate calcul answers as a percent rounded to 2 decimal places.) Stock A 7.50% Stock B 3.33% Expected dividend growth rates

Answer 1

a) Stock Dividend A payout Ratio - Dividend/share = 1 = 50 or 50% Earning/ Share Stock B Dividend Payout Ratio = / 5 = .67 66.67% growth = ROE / Dividend Retention Stock A growth = 15% (1-.50) = 7.5% Answer Ratio) Dividend Retention Ratio - (1- Dividend payout) ratio Stock B growth = 10 (1-067) = 10 x .33 = 3.33% Answer