Question

please show each step. thank you.

1. (1 credit) Wilson's Meats common stock is valued at $11.05. The firm pays annual dividends which increase at a constant rate. The last dividend paid was $1.24. The required return is 14%. What is the dividend growth rate? 2. (1 credit) John Wilde Industries has a retention ratio of 0.75, dividends of $46,000, and total equity of $2.9 million. What is the firm's sustainable rate of growth?

Answer 1

Required return = (expected dividend / current share price) + growth rate

Rearranging this equation, we get :

Dividend growth rate = required return - (expected dividend / current share price)

Expected dividend = last dividend * (1 + growth rate)

Let us say the growth rate is G. Then ,

G = 0.14 - (($1.24 * (1 + G)) / $11.05)

G = 0.14 - ((1.24 + 1.24G) / 11.05)

Multiplying both sides of the equation with 11.05, we get :

11.05G = 11.05 * (0.14 - ((1.24 + 1.24G) / 11.05))

11.05G = 1.547 - 1.24 - 1.24G

12.29G = 0.307

G = 0.307 / 12.29

G = 2.5%

The growth rate is 2.5%