Analysts expect MC, Co. to maintain a dividend payout ratio of 35% and enjoy an expected...
Analysts expect MC, Co. to maintain a dividend payout ratio of 35% and enjoy an expected growth rate of 12% per year for the next 5 years. After the fifth year, all earnings will be paid out as dividends. The required rate of return on MC, Co equity is 8%.
At what price would the analysts value the stock under their own expectations?
Homework Answers
Let us assume that face value per share is ₹100.
So dividend per share will be =100*35%=35(D0)
D1=D0(1+g)
=35(1+12/100)5
=61.68(value after 5 years)
P0=value of stock
Formula =P0=D1/ke-g
61.68/0.08-0.12= -1542
Note- It is theoretical problem otherwise cost of equity cannot be less than growth rate.
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